Tough decision indeed
A few days back I wrote a piece on ‘Young, Glamorous, Riskless and Broke’. This was about the kids born in the 1980s.
Let us take a kid born in 1987 – would have graduated in 2007-8 and finished his/her MBA in 2009. This was not a great season to graduate, but would have found a decent job – say paying Rs. 400,000.
Assuming that this kid was very smart he/she would have started a SIP in 2009 or 2010. Now if her parents were from the public sector or worse from the government cadre they would have said the following:
-put money in PPF
– buy a LIC policy – it belongs to the government, your money is safe
– make a RD in a bank.
A smart kid may have done all this with small amounts, but also started a SIP in an equity fund.
Circa Nov 2011. Very good chance that the SIP is showing negative returns, especially if it is a dividend payout scheme (like what all elss schemes ought to be). Imagine the conversation that the kid must be going through at home:
Dad: I told you not to put money in equities….see..you are losing money!!!
Kid: But dad equity is for the long term…
Dad: Do not teach me..I work in a bank, I know how it works
Kid: I am doing only 5000 per month – of which Rs. 3500 is in an ELSS
Dad: You could have opened a FD in my bank. Same tax benefits!
Kid: but dad the interest is taxable…na?
Mom: Just because you have done MBA you think you know more than your dad? He has 22 years experience in banking – same bank that too. He is now close to becoming a GM in the bank!!!
Kid: Mom I am not arguing, just telling you the facts…bank interest is taxable while mutual funds are free of tax…
Mom: Ok enough of your argument…see how much this money would have become in 2-3 years in a bank or PPF. Will it ever become that much in this so called equity? My friend’s son lost Rs. 3.5 lakhs in the share market. We are not so rich to lose it. Remember all this money will be required for your wedding…
Kid: Ok mom…bye see you dad…I will write the bank clerical exam. Afterall the MBA degree is not really helping….
My take on this conversation:
it is really difficult for kids (and even elders, but recent converts) to keep investing in a falling market. Their conviction is severely tested during such times. The market has really fallen off the cliff – and we do not know whether we are mid way or have reached the end. Some very smart people have stopped their SIPs about 12 months back and are currently looking smart.
However it does make sense, kids, to keep investing. If you are scared, it may make sense to reduce the amount – but if you are aggressive you should be starting a new one now! Ok, jokes apart, just keep the SIP going, and in 12 months, 20 months or 30 months, I promise you, your returns will be better than the debt options – all the best.
anon
I am bit confused about booking profits. I had started sips in april 2008 for small amounts since I was new to the whole thing. by nov 2010, I had got quite decent returns and booked some profits in one of the schemes whose rating/returns had gone down wrt peers. started more SIPS of larger values in 2011 but returns from earlier ones look quite poor.
how long should this money remain untouched ? I am fortunately not in need of it right now so I can let it remain.
anon
a bit confused about when one should book profits. I started sips in april 2008 and by nov 2010, had got really good returns. I booked some profits since scheme was going down in ratings/returns. now after a year, returns look quite poor, although I have increased the amount of SIP. since I dont require the investment money right now (mostly looking at it from retirement perspective), should one periodically book some profits when the market is at peak ?
anon
oops … comment got posted twice. please delete one.
pravin
in my case,the arrogance of youth helped me ignore the ‘advice’ of my parents when i started earning independently.plus it helped that i earned as much as my father was then earning.
its ok to make some mistakes when you are in your early twenties given that financial education is not even thought of as a worthy topic in school.if they could remove scouting and replace this as an option it would make us a savvier nation.
oh well,why even believe schooling is necessarily related to education.
Aditya Karnik
Well I can say I have experienced more or less the same. I just decided to have faith and continue my SIPs even during 2008 mayhem. I have stopped indulging into direct stock buys but SIPs is the way for me.
As they say, “When going gets tough leth the tough get going.”
Thanks Subra sir for touching this topic.
Regards,
Aditya
Jayant
Subra sir,
This is exactly the conversation I have been through when I just joined my job in 1999. That time it was tech bubble burst. Different reason but similar situations.
Praveen
Sir, I read of SIP based on nifty p/e. Like continue SIP’s upto” 18 p/e of nifty” at whatever it is. Stop/reduce SIP amount upto 20 p/e. If nifty crosses some 22 p/e book some profits as many say a nifty at 25 p/e is a bubble.
Is this somewhat sensible???
Rohit
Subra sir,
Thanks for touching this topic. It feels like you were writing my story. I was born in 1988 and have been working since last 2 years. I had read about ELSS in first month of my job and decided then and there that I would put all my money (as part of tax saving) into ELSS. And this is how I convinced my parents about it –
Of all the options under Sec 80c, ELSS has the least lock-in period. So if I get good returns in those 3 years and I need that money, I can redeem it after 3 years. But if unfortunately the market is down, I can treat it (in my mind) as tax-saving FD or NSC – which means I cannot access it for 5 years anyways! Similarly for even longer duration compared to PPF…
This way, I told them that ELSS provides me greatest flexibility and icing on the cake is that there is no tax! 😀
After sometime my mom also started SIP of 1000 😀
My investments are also in negative right now, but instead of stopping SIPs, I am adding extra 1k’s to the funds on regular intervals 😉
-Rohit
Anindya
Nice Story 🙂 Almost identical to mine..including graduation and all those years you mentioned in post..I have kept it going though..and waiting for a time 30 or 60 months down the line..when i don’t look like a fool anymore infront of my friends and family 🙂
geodesic
Subraji
Thanks for this post. I started SIPs since Jan this year as soon as the market started coming off the peak; since Sept I started putting lump sums in addition to the SIPs. Now that the markets are correcting severely I had a doubt at the corner of my mind thinking what if we have a bear market that lasts for the next 3-5 years.What if i turn out to be wrong? This post has reinforced my conviction.It is difficult to swim against the tide. I missed the crash of 09 and didn’t want to miss this time.Thanks again.
Shinu
I was much luckier that my dad never directed me in any investment decisions. Just told learn by yourself by reading and making mistakes… that’s what i am still trying to follow and is much better off. Thanks Dad.
Krish
This post is biased against last generation parents. Why to blame parents for directing into secure instruments albeit with lower rate of return. I have also seen other side of the story that Parents hold their equity portfolio for 25 years kept for kid’s education and marriage. In Year 2008-09, when the markets were crashed and the need was there, it was big dilemma for them whether to cash in or not. I really doubt whether equity investments would come to anyone’s rescue in times of urgent need be it a medical emergency, kids education and marriages.
Sreekant
I feel mostly people lose money in the stock markets because they haven’t really understood it fully before taking the plunge. It’s like driving a car without fully learning it and then blaming the car / traffic for an accident. It is also equally true that even an experienced driver could meet an accident and the same with the stock market. But that’s always part of life.
The following should probably be the gist of one’s approach to stock market investing.
1. Do a proper financial plan and invest in equity only for those goals that are at least 7-8 years away.
2. It is impossible to catch the market at the PERFECT valuation. It is always either overvalued or undervalued. So average your cost over at least one market cycle. (use the humble SIP)
3. Consider nature of your earned income. if you have a steady salary paying job, you can afford more risk with your investments. But if your primary income itself is very uneven & uncertain, you need to be a bit more conservative with your investments.
4. Start pulling money out of equity gradually 1-3 years before your goal. Yes, this is difficult both in a bull & bear phase.
5. Have an asset allocation strategy, review portfolio periodically ans re-balance if required.
6. The market should not be the basis of your investment, but your own goals, risk profile, return requirements etc.
IsItPossible
Not sure why you still gave below advice in this terrible market:
>>>> “just keep the SIP going, and in 12 months, 20 months or 30 months, I promise you, your returns will be better than the debt options”
Wouldn’t it better to put SIP money in CD or other form of relatively less risky financial instruments rather than equities for now!!! It may be necessary to keep aside SIP money every month but its not a RULE that you should invest in equities even when you see bad times ahead. Instead put that money in CD (some CDs allow you to add capital) or money market mutual fund or debt fund (since market is falling these funds tend to do better). Once the market stabilizes and turns around then you can certainly move money into equities, isn’t it!!!
SIMPLE RULE: If you do what everyone does (keep doing SIP in equities no matter what) then your average returns are also like everyone else. If you invest being smart enough then your returns are much more than average person and that’s how you build your wealth….
The best advice would be to start looking for a “resource” so that you can understand markets and invest intelligently (not like a trader or professional investor like Warren Buffet but rather like an educated average investor…). At the minimum, once you know how to align yourself with markets then you are in much better shape to benefit from your investment and build long term wealth…