Goal based investing…a must
For regular readers of my blog this is the nth time that investors who do not have a goal find it difficult to handle volatility in the markets.
If your daughter is 5 years old and you are saving for her education or wedding, how does it matter whether the markets touch 21000 or not?
21000 on the Sensex is just a number. Like 8k, 9k, 15k, 20k and 21k.
Not having a goal means you have a ‘Wealth creation goal’ or a ‘Retirement Planning Goal’. Whatever be the goal the asset allocation and how much to invest are actually a function of YOUR GOALS, YOUR UNDERSTANDING OF RISK, and your tolerance of risk.
So in case of confused investors the questions can be as varied as the following:
1. Market has gone up, should I stop my SIP?
2. Market has gone down, should I stop my SIP?
3. I had invested when the index was 15,000 now it is 20,000 should I partially book my profits?
4. I had invested when the index was 21,000, now the index is 16,000 should I stop my losses?
5. You can never make a mistake taking a profit – I read somewhere should I ‘book’ profits?
to me all these questions and a zillion others like this make no sense. Not trying to laugh at others, but wealth has not been created by ‘market timing’. Most of the wealthy people I know have been in the markets for 30-40-50 years. A few lessons are:
1. Compounding works, Compounding works, Compounding works.
2. In a long life of investing there will be ups and downs. You invest when you have money, and you sell when you need money. However if you need money in 2011 Jan that money is in bank fixed deposits or money market mutual funds. If you need money in 2031 that money is in equities. Immaterial of whether the index is 8k, 12k, 24k or 43k. It is just a number.
3. Value, Growth are all confusing words. Either sit and learn about equity markets or do a SIP in a well managed equity fund – Indexing is not working in India. When Prashant Jain, Naren Sankaran, and others underperform the index, we will shift to the index. No hurry now.
4. If you are young REJOICE when the market goes down, if you are 85 REJOICE when the market goes up. When BUYING you want markets to be LOW, when selling you want markets to be HIGH.
so if the market reaches 21k and your goal is 20 years away, just stop looking at the nav invest, invest and keep investing. Keep learning about investing.
And ha! reading this blog, Deepak Shenoy’s blog, Sucheta’s comments….will keep you grounded.
Vivek
“Best time” or “Best mutual fund” are not as important for long term investing as is “Discipline” to invest regularly.
subra
there is nothing called a best time or a best mutual fund at all…so you cannot find it
Ashok
Well said. I see many people “book” profits even in MF just to put the money in another MF after a week with the very same portfolio.
rrp
I am doing little more logic to SIP – “passive-plus” investing. Long term P/E of nifty is range of 15-22 most time. When P/E > 24 reduce the monthly amount for SIP as downside potential is high, bubble territory. When P/E is in 18-22 invest normal amount. When P/E < 15 – 18 ie recession,crash, invest much more than usual as upside potential is high .
(pardon me but i would like to add a rule like above to my investing , hoping it can give better return than simple SIP. )
Pradip
Subra,
Thanks for the timely reminder. And keep repeating the same mantra a zillion times. I was just contemplating stopping my SIPs and booking the profits as the sensex was getting too hot. But on reading your blog realized it doesn’t matter in really long term (I am 26 now.).
Trust me, I will tell about you to my grandkids. đŸ˜‰
Muthu
Compounding works – definitely – I fully agree with you. It’s a long way to go for indexing. Vanguard has decided not to come to India, may be as they feel the time is not ripe yet.
As you mentioned in a previous post, Tata Motors example, timing matters, if you are a stock picker.
As not all of us are endowed with great stock picking skills, we need not worry as long as people like (the numbers are increasing) Prashant Jain are there, they would build wealth for us. If these gentlemen consistently underperforms benchmark, then its time to start looking for indexing.
We are in a sweet spot and equity is must for everyone whose goal or investment outlook is a minimum 10 years or more.
Many would have read Peter Lynch’s ‘One up on the wall street’. Not everybody I come across have read the second one ‘Beating the street’ where he further talks about narrowing down on good stocks and mutual funds. At the risk of criticism of putting a large comment, I’m unable to resist sharing 2 important points he mentions:
–In the long run, a portfolio of well-chosen stocks will always outperform a portfolio of bonds or a money market account. In the long run, a portfolio of poorly chosen stocks won’t outperform the money left under the mattress.
–Everyone has the brain power to make money in stocks. Not everyone has the stomach. If you are susceptible to selling everything in a panic, you ought to avoid stocks and stock mutual funds altogether.
Praveen
A nice reminder post, when most of us are thinking about booking profits (or selling in panic/fear of downfall)
Puneet
bows down.
Asoke
Subra,
why is it that I do not find such lucid and well written articles on the websites of personal finance magazines etc.?
Superb article – hey guys this is not negative. A fantastic article to tell people how wealth is created. I guess however it has a limited audience – alas! this cannot be said on Television đŸ™‚
Marshal
thanks for reminding again.. i was very confused should i book profits stop sip and switch to debt..
now am clear stick to investment goal…
kavita
Dear Mr Subra,
Also a well written post for people who are learning about personal finance and new comers in the field of investments.
Thank you!!!
Rudy
Nice one subra… you should have a ‘like’ option as they have it on facebook.
Would you consider educating us on the nuances of why markets will keep going up in future.. how will factors like inflation, growth, valuation have played a role in an emerging economy and hence an emerging market and likely to play in an indian scenario…
thanks !!!
Siva
Market has gone down, should I stop my SIP?
thats what exactly i done to one of my SIP in Nov2008 for about 7/8, only to see the other SIP gave returns excess of 100%.
Siva
Market has gone down, should I stop my SIP?
thats what exactly i done to one of my SIP in Nov2008 for about 7/8 months, only to see the other SIP gave returns excess of 100%.
amol
The simplicity of this article is good. I found it similar to a chapter in some book. For a person like me with limited knowledge in financial domain articles like this are useful. Can we expect more such articles from you.
amol
Subra,
FYI
Just checked that Naren Sankaran is not managing the fund ICICI Pru Discovery anymore.