Turtle Talk - 31st December 2012

Sticking to pre-determined asset allocation, improving knowledge, and not trying to time the markets are some good investment habits

It's that time of the year again. A time to look back, reflect and ruminate. It is also a time to look ahead, resolving to learn from our past mistakes.

The year gone by has been a year when the point of equity returns being lumpy and non-linear was driven home forcefully. The benchmark indices rose around 25 per cent, much against everyone's expectations and forecasts. But such is the nature of the game. Equity returns are lumpy and not linear. Periods of slumber are followed by sharp bursts of performance. Investors, who attempt to time every move in the market often end up disappointed. This leads to widespread aversion towards equities, which in turn sows the seeds of the next bull market.

While shifts in market cycles rarely coincide with the turn of a calendar year, this is as good a time as any to re-orient ourselves and jettison certain calcified behavioural tendencies which may be detrimental to our financial well-being.

Here are a few new year resolutions which you can keep in mind:

I will not deviate from my pre-determined asset allocation: Asset allocation is often determined at the beginning of each calendar (and sometimes, financial) year in consultation with your Certified Financial Planner. However, during the course of the year, we could fall victim to various influences and be tempted to deviate from the same. More often than not, this is detrimental. Some investors prematurely broke their fixed deposits (FDs) and piled onto equities during the latter half of 2010 (much to the chagrin of their Financial Planners) as they felt that their FDs were not providing high returns. In end 2011, these very investors contemplated selling their equity holdings at a loss and investing in gold mutual funds, merely because they had performed exceedingly well in the recent past.

'Rear-view' investing will only lead to dejection. In any given year, some asset class will always outperform others. As we are not prescient enough to know this asset class in advance, it is preferable to be invested in various assets in that proportion which suits us best, based on our temperament and financial goals. Revisit this allocation either once a year or if there is any change in your financial circumstances. By doing so, we will be increasing our holding of the underperforming asset (for 2011 it was equities) and booking profits in the ones which have performed spectacularly (Gold Funds).

I will not predict anything: It is tragic to see the number of man-hours wasted in making predictions (although it does provide jobs to many in the financial markets). We all will be happier if we come to terms with our inability to predict anything, let alone something as nebulous as market movements. It is preferable to channelise that energy into more productive activities. If you do not predict you will also spare yourself a lot of disappointment, because most predictions invariably go wrong.

I shall not remain glued to business channels on TV: Just as we admonish our children when they watch too many cartoons, they too should caution us against watching business channels (except, perhaps, for entertainment value, and that too for only 30 minutes a day). First of all, most 'experts' who appear on such channels indulge in making predictions. Then their time horizon may not match yours. For instance, long term may mean one year to them, while for true investors it may mean at least one business cycle. Finally, there is no accountability for such predictions. For instance, several experts predicted in January 2012 that since infrastructure stocks had fallen steeply, they would handsomely outperform the Sensex over the next one year. Come December 2012, only a few have actually done so. Of course, they will have myriad reasons as to why their predictions were off the mark, but that hardly helps viewers.

I will bolster my knowledge: If you believe you are capable of taking personal finance related decisions yourself, it is imperative that you equip yourself with knowledge from the right sources. However, given the numerous options available, it is equally vital to know which sources to avoid. Do not attempt to take short-cuts by standing on the shoulders of giants. You should go one step backward and gather knowledge from primary sources such as books on investment or personal finance written by credible and acclaimed authors whose statements have stood the test of time. Benjamin Graham and Robert Kiyosaki are two such examples.

I will befriend the internet: Today, besides acting as a fount for knowledge, the internet has also emerged as the most cost-effective execution tool, be it for banking transactions, term insurance or mutual funds. Two good examples are online term plans and the soon-to-be launched 'Direct Plan' for mutual funds Hence, those who are "internet-phobic" could resolve to surmount their fear in 2013. This could also end their reliance on 'advisors' who are merely glorified executors.

If we focus on implementing these resolutions to the best of our abilities during 2013 we may avoid welcoming 2014 with Joe King's memorable quote "New year, same goal".

This article first appeared in Business Standard on December 30, 2012.

"Thanks to salary cycle, December starts with plans of celebrating on eve of 31st and ends with borrowing money in last week for the same". No matter how funny this line may sound, it struck my mind and made me thinking; forcing me to write something on it. People must have been all set to hit the discotheques, book the best hotels/ resorts, beach parties, etc to celebrate this New Year eve. As the trend continues, the rates charged by even the mediocre places are quite obscene and ridiculous. But that's normal as long as there is a party ready to pay for such places and events. If you take note in the past few years, hanging out at an expensive place to celebrate the New Year party is increasingly becoming the trend among the youth.

I asked a couple of my friends to explain their celebration of New Year at any expensive place. My question was simple "Dude, what is the point of paying double the usual price at a crowded place and still not being able to enjoy properly?".His answer was "All my friends are going. If I don't go, they will feel bad and I don't want to be left alone in the crowd. Why should I stay indoors when the whole city is outside" (very smart..!!).

Then I came to the point "how much does that place costs"?

"Rs 20,000, including everything" was the reply.

Shockingly, he earns barely 15,000 per month and he is ready to blow more than his monthly salary on a single night, for few hours. To my astonishment, he saves money for the entire year for this MEGA EVENT. This is a classic case of herd mentality, peer pressure and sheer madness.

This is not a post on the influence of western culture among Indians but on herd behavior. Fortunately or unfortunately, Indians have not seen a severe recession where people are fired from their jobs. Gone are the days when people used to work under the same salary for years. It is no longer a shock that even an MBA these days is not able to secure a decent job (decent means well-paying for most) which clears their student loan soon. This generation doesn't hesitate to change a great job for few more thousands, if not promoted or denied a raise. The question is how often you will change your jobs spoiling your credibility in the market. Here are some few suggestions this 31st of December that might be of some help in the future:

• 'Saving' money is an extremely important side of earning and equally crucial is to spend less than you earn. This is the paramount of all money lessons.
• Be frugal with your money. Otherwise you will end up borrowing money from banks, friends or in the worst case; from your relatives.
• Although Indians are far more cushioned by their parents in money matters, but your parents will not write cheques for you the entire life. It's your responsibility to be self- dependent soon and free them from your burden.
• Start maintaining a monthly expense sheet detailing your expenses and you will realize the amount of wasteful expenses you could have avoided. The best way is to invest first and then spend. Believe me, it work wonders..!

The above points are no different than already spoken Gyaan in many articles. But most people understand this pretty late. So learn to save money and be mindful of what you absolutely need. Your savings will be the best friend for you when you need help indeed. Now the ball is in your court whether to blow your entire salary on one night or start saving for something serious in your life. Wish you a happy financial new year...