Can you afford to live till 99???

Can you afford to live till 99???

Take a look at this article that talks about the real implications of low interest rates, especially for thrifty savers:

• Can you afford to live till 99???

We, in India, are nowhere near this kind of situation. However, we are moving in that direction. Our interest rates, in the long run, are bound to be aligned with global rates. I distinctly remember getting fixed deposit interest at rates upwards of 11-12% per annum in the 80's & 90's. We've already reached 6-7% levels, and are sure to go down further in the years to come.

And, the average age till which we will live has already gone well past 75 for the middle class and upper middle class. Éven the poor and lower middle class people have started living till 70.

Inflation is far higher than the official government figures. Just check out the prices that you paid for various items like tooth paste, biscuits, dal, oils, petrol, shaving cream, medicines, restaurant dinners, movie tickets, auto fares, etc. just a year back and compare the same with current prices.

To top it off, most of us do not have a good enough pension plan.

The combination of low interest rates, high inflation, increased longevity, nuclear families, and absence of high quality social security systems can be killing.

Awareness is the first step and a key pre-requisite to actual preparedness to face the situation depicted above.

Regards,

N

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Need for Savings

Need for Savings

First, some background info for this particular post:

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Happened to be chatting with a friend, and was suggesting that he get hold of a PAN card in the name of his HUF with a view to having an additional "taxable entity" in his family, thereby ensuring that he gets one more "exemption limit" of a couple of lakhs of rupees.

His response was a shocker. He started asking me as to how having a PAN Card for his HUF can help him reduce his taxable Salary income????

I probed further, and he mentioned that his income from all other sources such as interest, dividends, rent, capital gains, etc. were close to zilch. And he was only interesting in knowing whether the TDS on his salary income can somehow be reduced.

I was perplexed, and delved even deeper. I was curious to know as to how and why he has almost zero-income from Interest, Dividends, Capital Gains, etc. And he told me that he ends up spending almost all his salary income on either expenses or EMIs for his home loan. Thank God for small mercies - At least he had a home loan and hence was not spending ALL his income on running expenses.

And this friend of mine is an Engineer/MBA from top notch schools with a couple of decades of experience! The only saving grace was that he was not maxed out on half a dozen credit cards and that he was not in a deep hole of a debt trap!

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Now to the main post. Why should a typical salaried person with a kid or two and one or more other dependents save any money? Here is the low down to my dear friend:

• You are not going to
• Live forever
• Stay healthy forever
• Work forever
• Some day, you'll retire and in all probability, you'll live for a few years after that. Today's life expectancy for reasonably healthy upper middle class folks is well beyond 80, and I don't expect you to work for much beyond 65
• Your accumulated savings should keep you and your dependents going for at least 20 years after retirement. And remember, there is a good chance that your dependent may end up outliving you by 5-10 years!!! Look around you.
• There are blocks of "Big Expenses" waiting for you in the years to come
• Higher education of kids
• Marriage of kids
• At least 2 foreign holidays for the family per decade
• At least 6 instances of multi-day hospitalisation per decade
• You will not enjoy the idea of being a "dependent" on anyone, especially if you're used to "being the boss" and the "hand that brings the bread" all your life. Certainly, you'll not relish being financially dependent. And God forbid, what if you outlive people on whom you may be forced to be dependent, financially or otherwise????
• You have a better standard of living today than you did around 10 years ago, 5 years ago, perhaps even in comparison to a year back. And you'll be keen on improving your standard of living in the years to come. It costs money. Just tell your dad or grandma about the price of 1 KG of your favourite vegetable or a gram of Gold or a square feet of land or your last restaurant bill and look at the looks on their faces - That will be your response for every item of expense 10 years later, 15 years later.
• Don't believe a word of the public claims of inflation in the business papers - While they talk about 5-10% per annum, you know better. Things that you MUST BUY like rice, dal, tooth paste, shaving cream, shampoos, shoes, shirts, petrol, movie tickets, sanitary napkins, undergarments, broomsticks, floor cleaners, etc. are all becoming costlier at rates northwards of 15-20% per annum. Things that are becoming cheaper due to technological advancements like TVs, Laptops, Mobile Phones, Cameras, etc. need to be replaced ever more frequently as they become outdated. Even yester-year "once in a life time purchases" like cars are being replaced as frequently as twice a decade. All of this cost money. And loads of money. And I've not even spoken a word about so-called luxuries like jewellery, costly parties, etc.

All the above points are just a small portion of the strong reasons that exist for you to start saving money every month - right away! In case you have not been doing so already.

If you are convinced about the need to save money regularly, you are prepared to start thinking about a few other questions:

1. How much should I save?
2. How should I save?
3. What should I do with my savings?
4. Should I never take loans? Or is it OK to take some loans?
5. How should I invest my savings?
6. What is the meaning of
• Financial Planning
• Asset allocation
• Fiscal Prudence
• Risk Pyramid
• Risk-adjusted returns
• Inflation-beating returns

For answers to all such questions, do keep re-visiting this blog!

Regards,

N

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Power of Trading

Power of Trading

Many people misunderstand the concept of

• Long-term investing - To mean that one should sell only when one needs the money
• Asset Allocation - To mean that one should have a by-and-large-fixed proportion of surplus money to be invested in different asset classes at any given life situation (age, number of kids, etc.)

Both the above are completely wrong. I'll explain in greater detail in later posts.

In this post, I'm going to share with you hypothetical figures of the difference that one can make with

• Periodic trading, ie., periodically booking profits and re-entering at lower levels
• Slightly higher levels of returns by allocating a larger share in riskier asset classes.

Take a look at this table:

	Power of Trading, rather than holding long-term! Wonder if it is feasible???	Initial Amount Invested	Annual Return	No. of Years	Final Value of Investment
	Impact of buying shares at just 3% lower cost and trading periodically so as to get just a 2% additional return annually	97,000	1.20	10	600,598
		100,000	1.18	10	523,384
		97,000	1.14	10	359,600
		100,000	1.12	10	310,585

You'll realise something that ought to be obvious:

• A 6% higher return can mean an enormous difference to your portfolio value at the end of a decade. Hence, do ensure that you allocate a higher proportion of your disposable surplus in riskier asset classes like equity if you are looking at the long term
• A strategy that involves periodical profit booking and re-entering at marginally lower levels has quite a significant impact on your portfolio value at the end of a decade. Hence, make it a point to book profits regularly. This will also ensure that you
  • Review your portfolio regularly
  • Cut your losses from unintended dud investments far more quickly

Think about it!

And Act!

Regards,

N

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World Thrift Day - Why ALL of us Ought to invest in Equity

World Thrift Day - Why ALL of us Ought to invest in Equity

Dear Friends,

Wishing you all a very happy "WORLD THRIFT DAY" - Apparently, it is celebrated on October 30th!

To me, every day is a Thrift Day.

On this occasion, I'd like to make a preposterous suggestion: All of us MUST invest in Equity (either directly or through mutual funds - at least through Nifty BEES). Many may be aghast at this suggestion, saying that Equity is not appropriate for anyone who can't afford to take a risk.

However, I differ.

Take a look at the following table:

Reason as to why you must remain exposed to Equity!	Initial Amount Invested	Annual Return	No. of Years	Final Value of Investment
Even if the initial investment is half, if annual returns are much better, the final value will be much bigger over a long period of time. Moral of the story: Invest at least part of the amount in Equity to ensure higher returns over a period of time.	50,000	1.14	10	185,361
	100,000	1.08	10	215,892
	50,000	1.14	15	356,897
	100,000	1.08	15	317,217
	50,000	1.14	20	687,174
	100,000	1.08	20	466,096

You'll notice that:

• I've just assumed a one-time investment and have done the calculations for two different sums of initial investments - 50K & 100K.
• Obviously, I've assumed that the guy investing 50K chooses to invest in Equity while the guy investing 100K has chosen debt instruments like fixed deposits
• I've assumed a relatively ordinary level of 14% per annum returns for Equity, whereas many mutual funds have given far superior returns.
• I've assumed truly long-term time horizons.

You'll further notice that beyond 15 years, the guy who initially invested just half the sum initially actually outperforms the other guy.

That's the power of a combination of:

• Long time horizon,
• Compounding and
• Equity investing

If the above results are achieved with just a one-time investment, just imagine what you can achieve with a recurring investment in Equity with a good chunk of your disposable surplus savings!

Happy investing. May all of you grow immensely rich and wealthy beyond your wildest dreams!

Regards,

N

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