Stomach Churning Volatility : My Constant Companion

I have discussed many times on my blog about my no holds barred approach to EQUITY investments.  As an ERE (Early Retirement Enthusiast) I need to give my networth the best opportunity to increase during the accumulation phase of my working career.  The fervent hope in this asset allocation strategy is that equities are the best way to build up a corpus.

However, there is a high price that comes with a high risk portfolio that is heavily skewed towards equity investments. Obviously it is the highly volatile nature of the stock markets, that cause this risk, and the distinct possibility of suffering significant losses during market downturns. In this post I want to focus on the magnitudes of these swings and what it means to my portfolio in terms of gains and losses. We will use some back tested data, using historical index information

Portfolio Building: My Case Study

I am a confessed Early Retirement Enthusiast & I have blogged about my approach to retirement through Early Financial Independence. Saving & Investing for retirement is a good endeavor, something that most folks get serious about in their 40s in preparation for their golden retirement years into their 60s. However, the Early Retirement Enthusiast gets started much earlier, and typically takes on larger risk during the accumulation phase of their careers to amass the necessary corpus to enable financial independence at a much younger age. There is a strong emotional aspect to this journey, and I typically don't blog about my thoughts and feelings on that front. Here is an attempt at sharing with you how the emotional roller coaster ride feels like, as I approach financial independence.

Who is Wealthier? Uncle Scrooge or Donald Duck

My kids love watching cartoons. They are glued to the TV when their favorite cartoon characters are on, laughing along merrily at their silly antics. Of course the cartoon shows these days are very different from the ones I grew up watching. The favorites in my house are Chota Bheem and his gang, Kisna and friends, and Ben10 and Transformers. These cartoon characters are a lot more adventurous and get into more amazing mischief, than I could ever imagine. In our times, for one there was very little content developed purely for the Indian audience (except for Mowgli the Jungle Boy, and maybe a couple others). Also cartoon episodes would be much simpler unlike the ones today which have more elaborate and complex storylines.  So for this blog post, I figured I would use some old cartoon friends to discuss wealth as a concept. You will find other resources on the Internet, that describe wealth in this fashion, but what better way to remember a concept than through cartoons? 

Having a Good Discussion is Like Having Riches

Having a Good Discussion, is like Having Riches; so goes an African proverb attributed to Kenya. Thanks for the richness of discussion around my post titled A4 Portfolio on the FB page ASAN IDEAS for WEALTH. The fastest way to learn is to engage with other practitioners of the subject matter. I looked through the multitude of notes and comments and decided to respond in a Q & A format. This allows me to capture all the thoughts in one place, and also provides some continuum to the different perspectives shared by readers.

My 50+ Year Retirement Map : Do I Even Stand a Chance?

The single biggest challenge of an early financial independence and retirement journey can be quite a revelation.  Most people would think that the toughest part would be, how to collect and grow your corpus at a rapid pace to meet the requirements of early retirement.  

Though partially true, the real challenge (once you have of course reached your required corpus size) is to figure out how to structure your hard earned savings in a manner that will last through the entire period while you cool your heels and chill out!

The twist thrown in by the EARLY retirement, is that you have to spend a much longer period retired, which creates all kinds of crazy challenges and surprises for you to deal with.  I need to figure out a way to carefully nurture my hard earned corpus, which I would have built through the accumulation phase of my financial career, and make it last through all the turbulence I expect to encounter during the distribution phase in my golden retirement years.

My A4 Portfolio: High Risk and (Hopefully) High Reward

Asset Allocation forms the bedrock of any investment strategy.  You will find reams of pages spent describing different asset allocation strategies, for different phases in your career.

I have put in a fair amount of thought into what would make a good asset composition for my situation.  There is one critical factor I need to keep in my mind.  Since I am driving towards EARLY FINANCIAL INDEPENDENCE, I need a strategy that is tailored to achieving this goal.  

In this post, I describe my thought process, and share the actual asset allocation that I currently have in my portfolio.  I am looking for suggestions if there is further improvement to incorporate into my plan.  Read on and let me know what you think

Confessions of a salaried worker

I have a confession to make. It is not pretty, and it may not be something I like (or dislike for that matter) very much, but it is the brutal truth. Facts are facts, and must be stated as such. 

You might wonder what do confessions have to do with a personal finance, early retirement blog?

Well this confession has to do with my professional earning career. It is not earth shattering, but it is probably true for a lot of us, so please bear with me, and read on.

Multiply Networth 6X in 6 Years

First of all I apologize for the rather obvious eyeball grabbing title of this post.  But hey I do have the data to back it up so maybe it is not too bad after all!  

Well this is a follow-on post to the one I had done about a month ago about growing networth.  That post basically talked about some data points pulled out over the last 6 years detailing the growth of my networth.  As I clarified in my post earlier, this was not meant to be any indicator of portfolio performance, but merely my attempt to track one of the key indicators in my journey to financial independence and early retirement.  The key reason I track my networth is to be able to understand the dynamics of personal portfolio management, and how to improve the management over time.  In some sense you are the fund manager of your own personal networth (which is your own personal AUM), and you are constantly looking for ways to manage it better and nurture it to reduce volatility, and improve growth rates, consistently year over year.  

Intelligence versus Discipline

A combination of 

Ordinary Intelligence 

& 

Extraordinary Discipline

trumps

Extraordinary Intelligence

& 

Ordinary Discipline

every single time

Think about it!

Personal finance is the surest way to prove this!

India Personal Finance Websites 2015

Its been a while since I discussed the many and increasing set of resources available to personal finance beginners, learners, enthusiasts, journeymen, tax-savers, investors, traders, pundits, believers and their tribesmen and kin.  Since 2011, when I first blogged about a few sites that I had come across (India Personal Finance Websites 2011), the number and variety have increased in leaps and bounds.  

Here is a small set that I am most familiar with.  Please let me know if there are others that you find interesting.  I have also included a couple of lines for each site, describing my perspective of the site. We all approach our reading material from our own personal perspective, so please regard this as my view on the site content.  Yours could be different.  The key is to keep reading, keep learning, and keep contributing

Retire Early : Increase your Networth

The holy grail of early retirement is to push your networth up as quickly as you possibly can to help meet your retirement goal.  I have earlier described how to arrive at your networth target. Today I will focus on the efforts I have put in over the years to build out my overall corpus, and the results of that rather arduous exercise.  I say arduous because it certainly has not been easy going to try and watch your networth grow slowly in spite of the challenges you face everyday.  Here is a description of my journey so far, and some tips on how I have gotten here.  Read on, and feel free to provide me ideas and suggestions on what I should be doing going forward.  I certainly need all the help I can get to realize my dreams.

RBI : To Cut or not to Cut, that is the question!

The RBI June policy review meeting is scheduled for tomorrow, and the Indian markets and economy will be waiting with bated breath to see what RBI governor Raghuram Rajan has to offer this time around.  

This time general consensus is predicting, almost demanding, a 0.25% repo rate cut.  A few optimists are in fact suggesting that a 0.5% repo rate cut might be on the cards.  I for one think Raghu will stay with a 0.25% repo rate cut.  

The CRR (Cash Reserve Ratio) might also see a cut of upto 0.5% depending on how much liquidity the RBI governor wants to release into the markets. 

Both of the above should provide a healthy uptick to the Indian stock markets tomorrow.  The repo rate cut of 0.25% is probably already baked into the market, so only a higher rate cut will move the needle.  On the flip side, no rate cut will be a huge downer, leading to a large fall in the indices.

The CRR impact may not be immediate, but should help overall.

As always rate sensitives like banks, NBFCs, Auto and Auto ancillaries, will benefit the most from any reduction in the repo rate.  I am also hoping that long term GILT funds will benefit from any interest rate reductions coming up.  I had reiterated my resolve to build up a position in GILT funds late last year in december.   Since then, I have been slowly accumulating GILTs.  The performance has not been spectacular, but it hasn't been a loss either.  I will come back after this monetary policy review with some performance analysis of long term GILT funds, in a falling interest rate scenario.

Till then, here is hoping Raghu gives us a helping hand!

NIFTY50 beats DOWJONES in last decade : NIFTY comparison to DJIA 2004 to 2014

Nowadays the buzz word in equity investing seems to be diversification and globalization.  Every news channel that you see will be awash with pundits describing the benefits of diversification, and exposure to international equity as one such avenue.  But this is something I wanted to check out and figure for myself.  The best way would be to simply compare the performance of the Indian stock markets vs a major international stock index, and the obvious one that comes to mind is the US stock market.  So I set out to compare the performance of the NIFTY 50 as a proxy for the Indian stock markets, vs the DOW JONES Index, which is a proxy for the US stock markets.  This analysis is useful in 2 scenarios.  There are several NRI investors who struggle to decide whether to keep their investments in the US, or deploy them back home in India.  There are also India based investors wanting to get a piece of the US market action in the name of diversification.  Both these investors are looking for the same thing, which is the best returns on their investment Dollars or Rupees.  In this article I have attempted a simple comparison of the US and Indian stock markets, by contrasting the NIFTY vs the DOW.  The results certainly surprised me!  Why don't you take a look for yourself here.

Am I Earning Enough

Being a salaried employee, the bulk of my dreams of an early retirement are funded by what my corporate employer chooses to pay me every year.  My fortunes are inextricably linked to my salary.  I have tried over the years to build a secondary stream of passive income, but progress has been slow on this front.  So I figured I should take a minute to get a handle on my salary progressing over my working career. It took me a while to dig up the data, since this is something I have never really separately tracked. I have always focused on my networth, and my savings rate, but never really looked at how much my income is, and more importantly, how it has been increasing/decreasing over the years.

NSDL CAS : One stop window into all your investments

One of the most common challenges of the early retirement or personal finance enthusiast, is the ability to meaningfully track all their investments from a common platform.  The investment avenues are so diverse in India, that typically your investment universe is spread across everything from your friendly neighborhood banks, online brokerage portals, MF AMCs, online portfolio management tools, your own local excel spreadsheets, insurance agents, relationship managers, post-offices, and the list can go on and on.  How does one really manage all of these different avenues, and more importantly is there a single platform from which you can access and view all your different investments?  If this sounds familiar, read on.

Quotes : Do It NOW!

A good plan violently executed NOW is better than a perfect plan executed next week

-George S Patton

Quotes : Millionaire Next Door

Whatever your income, always live below your means

-  Thomas J. Stanley, The Millionaire Next Door

How to Retire Early : Equities, Equities and More Equities

If you have been reading early retirement blogs regularly, and researching the web and books for strategies to achieve your early retirement goals, you must be very clear in your mind that saving a large enough corpus for early retirement is a very daunting task.  

In India, and I am sure pretty much everywhere else in the world, saving enough just for a regular retirement wherein you retire by 60 years, is tough enough.  Amassing wealth at a faster pace, so you can accumulate a sufficient corpus at a younger age, and leave the daily grind of the corporate work force, is a mind boggling challenge.  

I have written before on this blog about the need to save as much as possible, as a percentage of your take home income.  However, I am also looking for ways to increase my return on investments, to accelerate the rate at which my total corpus grows.  

Networth Calculator

Earlier I had posted a web article, describing how much net worth you should have accumulated by a certain age, with a table showing how you can calculate your expected networth, based on a few assumptions that you can make.  Here is a online calculator that you can use to estimate your expected networth with any starting assumptions you want to make, suitable to your personal situation.

Here are some recommendations on how to use this online calculator

Am I Saving Enough?

I had published this post a couple of days ago, based on a concept borrowed from the book "The Millionaire Next Door" about your expected networth or corpus at any given age.  The post describes how to calculate your expected networth assuming you save at a certain rate, and your investments and salary grows at a certain rate.  Since that post, I have got several queries from readers for their specific situations that I am doing my best to respond to.  One recurring question is around the annual salary assumption I have made.  Since different people have different salaries when they started, either higher or lower than my assumption in the table calculation, the common question is, how do I calculate my expected corpus for my salary situation.  

How Much Money Should I have Saved by Now ?

Ever wonder how much money you should have saved by now?  Or more specifically, what should your networth or total corpus be at this time?  I am sure as you are saving and investing for retirement or any other goals, you must be thinking, am I saving enough, and is my corpus growing at the right pace?  How am I doing compared to others?  If you have these questions, don't worry, you are not alone!  We all think about this every once in a while, I am sure.  

You must have heard about this book called "The Millionaire Next Door" that talks about, among other things, the concept of networth and provides a simple formula for how to calculate your expected networth over time.  Like most books, this one also is based in the US, for American readers, and hence the thought process caters mostly to their situations.  

However, the concept is definitely interesting, and something that I figured can be explored in the Indian context as well.  So here is my attempt to calculate the expected networth or corpus for the Indian context.  

Locking in Losses

We are in the last week of the Financial Year, here in India, and it is time for me to lock in any short term losses that I have incurred in my direct equity investments this year.  This is something that I routinely do at the end of the tax year, due to the way taxes are structured in India.  My goal is to lock in STCG (Short Term Capital Gain) losses, to either offset any STCG gains from this year, or from future years (since you can carry over STCG losses into the next year) Remember you cannot write-off STCG losses against salary income.  Also note that LTCG (Long Term Capital Gain) losses cannot be written off against STCG gains (They can be written off against LTCG gains, but then LTCG taxation on equity is NIL, so there is no real benefit)

Building Wealth One SIP at a time

The bulk of my financial investments are in equity markets, since I believe that is the best way to create and build wealth.  However, I suck at picking stocks, since I have little formal education in how to analyze companies, balance sheets, and business models.  Instead I rely on Mutual Funds to do all the hard work for me, and pick the right stocks.  

The cornerstone of my MF investment strategy has been HDFC PRUDENCE fund.  This is a hybrid or balanced fund, that invests upto 70% of its assets in equities and the remaining 30% in debt instruments.  You can look up websites like valueresearchonline.com to analyze fund performance, stock holdings, etc.  The bulk of the wealth creation for me over the last 10 years has been through HDFC PRUDENCE.

Inflation : Cost Inflation Index

Inflation is a well known "Retirement Killer".  Long term goals like Retirement, Children's Education, Children's Marriage, etc are highly susceptible to the ravages of inflation, since the long term nature allows for massive compounding of the ill effects of high inflation.

Cost Inflation Index is the fancy term that the Indian Income Tax Service uses to quantitatively measure inflation.  This is a reasonably good measure of inflation, since the Indian government effectively chooses to waive any taxes if your investment is growing in line with the CII.  There are many websites you can read up to understand how CII works.  In effect it says that if your investment grew at the same pace as CII, you will not owe any taxes on the growth, since the Indian government acknowledges that your "growth" is only notional and not real.  

Role Models : Financial Samurai

Here is a kindred spirit who blogs about his successful Early Retirement Journey.  The blog is called Financial Samurai and it covers Sam's journey from the financial industry into financial independence, and eventually early retirement.  

The blog again is focused on a US based retirement model, since the author is US based.  However, I still find several of the thoughts and strategy (if not actual tactics) to be relevant in the Indian context.  

It does sound like Sam derives some post-retirement income through work on his website, and royalties from a book that he has written.  However, for all practical purposes he is retired.

Read on, and derive encouragement from his story.  You are not alone!

Portfolio Strategy : Mar 20th, 2015 : Banks Battered

Since the beginning of this year, I have been placing my bets on banks, in the hope that interest rate cuts will help them to improve their balance sheets, resulting in higher earnings, and hopefully increased stock prices.  Unfortunately, after appreciating quite a bit in late January this year, the BANK NIFTY has gone through a period of high volatility, followed by almost daily declines in value over the last couple of weeks.  Here is the chart for BANK NIFTY this year

As you can see, returns have been practically flat for the 3 months of this year, after a torrid rally last year in 2014.  I have not given up hope as yet, but increasingly it looks like we will not see the bull rally of last year repeated this year.  The high volatility is good for SIP investments, if you catch the troughs in the chart for your SIP timelines.  

For now I intend to hang tough and see how things pan out in the rest of the year for the banking sector.

Retire Early : Why?

I occasionally get asked by my readers, Why I want to Retire Early? What is the hurry?  Why the rush?  Why would anyone want to retire early at all?  In my mind it is rather clear and actually obvious why I want to quit the rat race as soon as possible.  It makes perfect sense to me, why I would want to stop working on a regular basis, and spend my time as I deem fit.  However, I have never written a blog entry clearly articulating my reasons for wanting to quit the corporate rat race once and for all.  Recently a reader chimed in with the following: Why should some one retire early if you like the job earn enough, spend wisely and work without any pressure for 35-40 years? I was about to start typing up a furious reply to what I thought was a rather silly question, when I came upon this recent announcement from the Google CFO Patrick Pichette.  On March 11, 2015, Patrick decided to quit his high flying, lucrative CFO job at Google, arguably the best company in the world to work for, and retire for good.  I read through his retirement memo, and realized that he had written from his heart while explaining his difficult decision.  Read on to understand more about why Patrick took this drastic step.

What is Early Retirement? How many years before I retire?

I routinely get asked by readers of my blog, about my age, how many years I have been saving, and when do I plan to retire.  There are others who write me asking about my definition of early retirement.  Would retiring at the age of 50 be called "early retirement"?  How about if you took a Voluntary Retirement option from your company, and then took up another less demanding job?  Does that meet the definition of early retirement? And so on and on.  Here is how I look at it, and it has nothing to do with your or my age, if you can believe it!!

Portfolio Strategy: Feb 7th, 2015: Banks Underperform

I have been putting my bets on financials for some time now, specifically focusing on banks.  I had written about this earlier in Dec 2014, and again in Jan 2015.  Banks have done very well over the past year as shown in the performance of the BANK NIFTY in the graph below.

Just in the last 6 months as shown in the picture, the BANK NIFTY has given returns of ~25%

How much should I save before I retire?

The critical question for all retirees is "Have I saved up enough money to last the remainder of my lifetime?"

I had written earlier, about how to calculate the corpus you need to be able to retire financially independent.  The amount you need depends on only 2 factors, your estimated annual expenses, and the number of years you need to live in retirement.  

Portfolio Strategy: January 6th, 2015: Markets tank 3%

Happy New Year, and we get pummeled by a 3% drop in the market which was pretty broad based. The SENSEX, CNX NIFTY and BANK NIFTY are all down 3% today, in what can only be described as a sheer bloodbath on Dalal Street.  It is on days like this that your conviction to stay invested in the market takes a beating.  All of the recent volatility is attributed to global uncertainty with the continual drop in OIL prices and the EURO crisis focused on the Greece debacle.

Since I have been focusing on financials and banks in particular, my overall portfolio certainly took a large hit today.  However, I did use this opportunity to rustle up some free cash, and invest in the GOLDMAN SACHS BANK BEES ETF, that I had mentioned a few days earlier.  I am still a believer in the overall India growth story, and feel this pullback is a good investment opportunity.  I know I am effectively timing the market here, which is never a good strategy, but this is money that I should have had in the market in the first place, so what better time than now to put it in.

Here is hoping that the Greece crisis blows over, and things settle down on the global front!