I am a huge fan of the Mastercard advertisements, "There are some things money can't buy, for everything else there is Mastercard". The latest one is my favorite, the reunion of four friends at a five start hotel. To the tune of 'Purani Jeans" a middle aged executive takes a flight(travelling first class) and buys gifts for his friends, all the while reminiscing about their youthful days when the four of them tried to fit on a single scooter. They have dinner at a five star, and fight over who pays the bill, just like they used to, so many years earlier. Only this time they are fighting to pay. And tbhey resolve it, as they used to before, with a coin toss..
Wow. Dreams do come true. This is a financial fairy tale, hope we all get a piece of this feeling in our lives.
Sunday, October 26, 2008
Investing in equity
A lot of people including myself, have lost money in the recent down turn of the equity markets. Some are indifferent, some are looking for buying opportunities, but most people are in trouble.
A very small percentage of India is invested in the stock market. It's a really good thing that government backed retirement investments ( read PF, PPF) are not invested in equity. Yet there is so much talk of middle class India's wealth being wiped out. There is even talk that the government should step in to protect small investers!! (And how is that supposed to happen?)
It's really sad that many of the middle class people who have to endure losses they can ill afford are in this soup because of their own greed. It sounds a harsh thing to say, but this is true. Why should anyone sell off their gold, their house, or take a loan (yes, I know people who have) to invest in equity? Why should anyone put money that they need in the coming three years (and this is the absolute minimum) in stocks? Naturally that was a recipe for disaster.
My two cents on the cardinal rules for investing in equity:
1. Invest money that you do not need in the next 5-7 years. Only invest if the time horizon is greater than that, as this will give you time to weather the highs and lows.
2. Assess your risk tolerance. Invest according to that. Make adjustments as you grow older, your income and goals change. Most importantly, and this is where people miss out, make adjustments if one asset class outperforms the other. Let's assume you have arrived at 50% equity and 50% fixed returns for your asset allocation. And that your investment in equity appreciates by 100% (it happens during boom times if your stock pick is spot on). Then you should take some money out of stocks and put it into fixed returns. How much? That depends on your risk appetite and time horizon.
3. Diversify. Invest in asset classes like debt, equity, gold, real estate. Within equity, build a varied portfolio across industrial sectors. Never have a portfolio where the stock of a single company (however blue chip) dominates. Also, very importantly, do not let company stock be a major component of your portfolio. Your income is anyway dependent on the performance of the same company :-). If you receive some of this stock as part of your employee benefits, hold on to it until the minimum mandatory period, and then sell off the percentage of it that is not in tune with your portfolio.
4. Invest in equity only if you are comfortable doing so. Not because everyone else at your workplace, or social circle is doing it. This is not a race, this is about each one making their money to work for them. After all, money is a good slave, but a bad master.
A very small percentage of India is invested in the stock market. It's a really good thing that government backed retirement investments ( read PF, PPF) are not invested in equity. Yet there is so much talk of middle class India's wealth being wiped out. There is even talk that the government should step in to protect small investers!! (And how is that supposed to happen?)
It's really sad that many of the middle class people who have to endure losses they can ill afford are in this soup because of their own greed. It sounds a harsh thing to say, but this is true. Why should anyone sell off their gold, their house, or take a loan (yes, I know people who have) to invest in equity? Why should anyone put money that they need in the coming three years (and this is the absolute minimum) in stocks? Naturally that was a recipe for disaster.
My two cents on the cardinal rules for investing in equity:
1. Invest money that you do not need in the next 5-7 years. Only invest if the time horizon is greater than that, as this will give you time to weather the highs and lows.
2. Assess your risk tolerance. Invest according to that. Make adjustments as you grow older, your income and goals change. Most importantly, and this is where people miss out, make adjustments if one asset class outperforms the other. Let's assume you have arrived at 50% equity and 50% fixed returns for your asset allocation. And that your investment in equity appreciates by 100% (it happens during boom times if your stock pick is spot on). Then you should take some money out of stocks and put it into fixed returns. How much? That depends on your risk appetite and time horizon.
3. Diversify. Invest in asset classes like debt, equity, gold, real estate. Within equity, build a varied portfolio across industrial sectors. Never have a portfolio where the stock of a single company (however blue chip) dominates. Also, very importantly, do not let company stock be a major component of your portfolio. Your income is anyway dependent on the performance of the same company :-). If you receive some of this stock as part of your employee benefits, hold on to it until the minimum mandatory period, and then sell off the percentage of it that is not in tune with your portfolio.
4. Invest in equity only if you are comfortable doing so. Not because everyone else at your workplace, or social circle is doing it. This is not a race, this is about each one making their money to work for them. After all, money is a good slave, but a bad master.
Diwali...the festival of lights
Goddess Lakshmi seems very angry with the entire world. So much wealth has been lost in the equity markets, companies are in the red, people are afraid of losing their jobs, inflation at a decade-old high. All of this means a very subdued Diwali.
It's a time for quiet reflection, and introspection. Do we really need all the stuff we own? Are we truly diversified in our investments? Have we assessed our risk appetites correctly?Are we spending to make ourselves happy, or to display a certain image?
As we clean up our homes today, it's time to declutter our thoughts. It's time for a new beginning.
It's a time for quiet reflection, and introspection. Do we really need all the stuff we own? Are we truly diversified in our investments? Have we assessed our risk appetites correctly?Are we spending to make ourselves happy, or to display a certain image?
As we clean up our homes today, it's time to declutter our thoughts. It's time for a new beginning.
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