Guest Post – Fear and Greed

An experienced long-term investor once told me that when he looked at his face after a share market fall he found despair and fear, while the same face showed enthusiasm and happiness with a share market appreciation. This made him realize that greed and fear were the 2 magnetic forces that caused confusion in investment goals. A balanced and objective approach would help him achieve his long-term financial goals.

Hindrances to positive and objective approach to investment decisions:

My close look at investment behaviour has made me realize that fear and greed is not separate but complimentary emotions in an investor. Greed is merely a mental state born out of fear, with investors feeling the fear to lose money and then being unable to meet their family financial obligations. In addition, social pressures to earn in line with close relatives and friends and provide for benefits like higher education in a prestigious college, a grand marriage for children and a house with all modern amenities and furnishings leads to greed.

It is interesting to observe our brains dwell in the middle of negative emotions like fear, disappointment and greed, and these emotions influence our investment decisions, creating confusion in investment decisions. So we as investors start looking for security and confidence in our investments.

This makes me highlight 2 powerful influences on investor behaviour namely

  1. An investment portfolio based on ones personality
  2. The follow the flock policy

Basing investment portfolios on ones personal likes and dislikes are the first of the powerful influences, it is like investing in cars and fancy gadgets just because you love them. Investing on shares just because you think they are smart or flashy is ambiguous, for they could sink in the long run. It is better instead to invest in profitable ventures that pay in the long run. It is true; our investment fancies make us pay a heavy price.

The follow the flock for fear of being the black sheep policy makes you as an investor to believe in following others in the share markets. You would then be playing a vital role when the going is good and exiting never to return when the share market goes down. The pitfalls of group behaviour lead us to buying high and selling less.

It is also true that follow the flock behaviour leads to unbalanced investment emotions of black or white (wrong or right) with no shades of objectivity and rationality. In addition, group behavior leads to extreme situations of profit or loss and price swings in the share market that is highly undesirable. Buying high and selling low has made many investors suffer heavy losses in the long run.

A look at positive investment behaviour:

Aim at lower returns for market forces play a very vital role in deciding the price. It is good to be investment smart with humility and lower aspirations that makes achievement of financial goals a reality. I have never known of any high return investments that did not have high risks.

Patience over a lifetime and being able to assume stress helps in aiming for long term positive returns and contributes to assuming less financial stress after retirement.

Positive investment behaviour requires balanced moods, one of neither elation nor panic. Neither selling in a panic due to share market positions or adverse world or country conditions is advisable, nor is a reaction of extreme financial prosperity, both can destroy a lifetime of healthy investment. A long-term investor needs to realize that neither despairing nor elation of situations in civilization proves worthy for long term financial portfolios.

Let’s just sum up:

I am sure you would be congratulating yourself with all the knowledge gained and would neither allow emotions, group behaviour nor your personal likes and dislikes to influence your long term financial goals. It is true you would have also realized that patience, humility and appetite for stress could contribute to long-term achievement of your financial goals.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

 

Guest Post – Exoskeleton Allowing The Paralyzed To Walk

Technology is really doing amazing things. Being confined to a wheel chair for your entire life is something many of us have difficulty even imagining. Small things most of us take for granted like the ability to make eye contact without looking upward is something that up until now just wasn’t possible for those paralyzed. A company called Berkeley Bionics is working to change all of that with the first “practical” exoskeleton.

Berkeley Bionics’s Elegs

The elegs by Berkeley Bionics are a relatively lightweight and portable exoskeleton system that allows those paralyzed from the waist downs to walk again. The elegs are based on HULC technology, which was developed by the US military to allow lifting things heavier than 200 pounds. The person operating the elegs first has their lower body securely snapped into the exoskeleton. A series of complex sensors in the elegs then help the user move one leg forward and evenly distribute their weight. The elegs users hands, meanwhile, use crutches to ensure balance when switching legs. While the system is being developed so anyone can use it, right now it works best with those who were recently paralyzed. If the person was recently paralyzed then they still have walking in muscle memory, and this helps immensely when using the elegs to walk.

Where The Elegs Are Now And Where They Are Going In the Future

As of right now the elegs are still in the closed testing phase. This means that while the technology is functional now, the total cost and difficult of use makes it impractical for the consumer market. Berkeley Bionics has already hinted at the next version of the elegs currently in development. According to Berkeley Bionics, the next generation of the elegs is designed form the ground up for real world use. The example they gave was being able to put on the elegs in the morning and perform tasks like driving and hiking without ever having to re-adjust the exoskelton. Seeing the amazing strides made with current technology, it’s likely that a viable option to allow those paralyzed to walk again will be available for purchase within 10 years.

Bio: Tracy Sitchen is a veteran coupon clipper, stay at home Mom, and aspiring writer. While she loves shopping, she loves the chase of the deal even more! She’s recently been writing about Houston Aquarium coupons along with Old Spaghetti Factory coupons over at her blog where she shares deals and discounts to help every day people save money.

Guest Post – The Risk of delaying Financial Decisions

Is lack of time making you go crazy in your attempt to plan your finance? Does your busy professional schedule offer you time to monitor your personal finance?

Balaji is working for an MNC. Today he has got a deadline for a particular assignment. His day is fully packed. First thing in the morning, he receives a mail from his HR Dept stating that today is the last date for producing proofs for tax saving investments; otherwise a huge amount will be deducted from his salary as tax. He wanted to do some tax saving investments urgently and submit the proof on or before end of the day.

Mahesh is an NRI, working for a software company in US. He has got a couple of crores in his overseas fixed deposits giving a return of 1.50% p.a. Returns are taxable. At times, he thinks that the return what he getting is very low.  He wanted to check up with a professional financial planner in India. He thinks he will contact as soon as his present project gets completed. Like this he has not contacted any financial consultant for the last 3years because of some reason or the other.

Most of the investment decisions are either taken because of some compulsion or urgency or postponed because of compulsion or urgency in some other area of life. This is because we want to complete the urgent thing first not the most important thing. Many important things that contribute to our overall financial objectives and give richness don’t tend to give any pressure on us. Though they may not be urgent, they are the things that we must give importance and carry out immediately.

We act upon things like pressing problems, deadline-driven projects, and official meetings. We don’t give importance to

  • prepare for a meeting with a financial planner;  appraising a financial planner before making investments
  • planning activities like budgeting, children’s future planning, retirement planning;
  • protective activities like taking a term insurance, house holder policy, health insurance;
  • empowering ourselves by upgrading our knowledge with reference to investments

Why we are not able spend time on important things and spend most of our time on urgent things?  Because, we are following a way that focuses on how fast or efficiently we are getting things done. We are not following a way that focuses on why we are doing things.

Take the case of Mr.Balaji. Why didn’t he do his tax planning during the beginning of the financial year itself? Why is he chasing at the last minute? Balaji is much worried about his deadline for assignment than tax planning. As he is making investment urgently, it is difficult for him to choose the right financial advisor and also difficult to judge which one would be the best tax saving option for him. He will be investing with an advisor who can get the investment proof on the same day.

Is this the basis on which we select an investment advisor? Will the relationship of Mahesh and this advisor be a long term one? Will this investment is going to be of any help to Balaji in meeting the higher education expenses of his son after 15 years? Coming to the case of Mr. Mahesh, he had couple of crores at 1.5% pre-tax return. He could have tripled his returns by investing in an Indian liquid fund which is very safe.  There are far better investment options available for him to choose. But he has settled for 1.5%.

If he could have spent a day or two in carefully choosing the right financial advisor and investment product he could have earned more. The earning opportunity which he missed with his investments might equal to his 6 months or 1 year salary. He could have generated that passive income equivalent to 6 month or 1 year salary without any pressure from the top management; without meeting any deadlines by just spending a day or two. We are all working hard for money. Is our hard earned money is working for us or lying in our SB a/c or really growing?

We find a ladder and see there are so many people trying to reach the top of the ladder faster.  Then we also follow the group, deadlines to be met in each and every step; focusing more on reaching the top and finally reached the top. Only after reaching the top, we realize that we have come to a very wrong place or a place which is not worth missing so many things and opportunities in life. This is how the today’s world is. Nothing wrong in working harder or focusing more on completing the assignment or spending more time on finishing the project  on deadline. These are all good thing to do. But always remember, there are better and best things to do. We keep too many good things ahead of a few best things.

Setting up financial goals; working out a plan for achieving those goals; and implementing those plans are all best things to do in life. You know in advance where you want to reach exactly, by doing this exercise. As we progress, we enjoy the journey. As we reach the place, we really feel happy and we have not missed any important thing on the way. Procrastination and not giving priority to financial goals and investment plans are costliest mistake one can take. So let us stop procrastinating and give priority to our financial goal setting and investment planning. Then life will be really so beautiful.


The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

 

Guest Post – How to save more by spending smarter?

Saving more by spending would be ridiculous, but by smarter spending it would be the best thing you can do to yourself. To be able to manage your everyday finances is a great art in itself, and the Guest post by Mr. Ramalingam is trying to help with just that. But to be able to be ideally manage your finances better, you would need to monitor it first. More on that in further posts, but here is his thoughts on how to save more

The willingness and the ability to save money is the secret of building wealth. So as to save money, you need to spend less than you actually earn. Though it looks very simple when you say, it is really difficult to implement. There are plenty of ways to help you start saving money even on the very tight budget. Saving money or spending less is all about the personality, belief system, values of a family. Spending less and saving more are lifelong living skills that need time to develop. Unless and otherwise, you have a written financial goals, you will lose your focus and go after consumerism and materialism.

To save more, obviously you need to spend smarter. To spend smarter, you need to understand you own spending patterns.Consciously you need to track all your expenses on a daily or weekly basis. So that you will be able to find out what influences your spending pattern.

Spending money has got so many influencing factors. But all these influencers can be classified into five broad spending influencers.

  1. Emotions: Your emotions play an important role in your spending pattern. The positive feelings like happy, fun, joy can influence you to spend more on entertainments and gifts. The negative feelings like envy, jealous, shame, stress, depression, frustration can influence you to spend more on smoking, drinking, buying things you actually don’t need, relaxation and healthcare.
  2. Traditional Thought: This is because of you belief system and your thought process. I need to buy a silk saree every year for my wedding anniversary. I have to bust crackers for Diwali. These are all the classic examples of how your traditional thoughts will influence your spending pattern.
  3. Society: Society in which you live will have more influence on your spending. You have to buy a car as all your colleagues are coming to office in their own car. On the occasion of your kid’s birthday, you need to arrange gifts for all the classmates of your kid.You should be watching this movie, on a first day first show.This influencer is caused by friends, colleagues, neighbours, relatives, and club members. Even at times, the advertisements and promotional offers like a discount sale can make you to spend more.
  4. Habits: Habits formed when you are growing up can make us spend impulsively. Generally this will be for our sensual pleasures.Spending on movies, music, eating out, smoking, drinking are the best examples of these influencers.
  5. Commitments: This includes paying off your debts and loans, commitments towards family like school fees, buying groceries and other provisions, paying rent, paying for medical insurance. You are committed to pay these expenses earlier.

By tracking and analyzing your each and every expense, you will be able to identify the influencers which made you to spend.Here are some strategies to overcome these influencers and spend smarter:

Control Your Emotions:

Instead of spending money, you can control your emotions by doing something else like doing yoga or meditation, watching comedy shows on TV, going to temple or beach. You need to solve the root of the emotion. You have to do introspection and need to keep a balanced mind always. Balanced mind is a key for spending smarter.

Self Talk:

You need to consciously change your thought patterns to come out of traditional thinking. “I don’t really need a saree for every wedding anniversary”. “I am not a kid; so I need not bust crackers on diwali”. These kinds of auto suggestions will change your thought process and you will be able to really prioritize things on which you spend.

You are unique:

You were born original. Please don’t die a copy. There is no need to feel bad if you don’t get to spend or buy things like your friends or people around you. You are unique and special in your own way. You need to discuss with your family and friends about “How to live happily by achieving compromised spending patterns?”

Learn and unlearn Habits:

The unwanted habits which make you spend more can be unlearned. Good habits which make you spend smarter can be learned. Habits can be learned and unlearned. But you need to know it is not a quick fix. It involves a process and a commitment.
A habit is an intersection of knowledge, skill, and desire. Knowledge is ‘what to do and the why’. That is we need to spend less to save more and become richer. Skill is ‘How to do’. That is ‘how we spend less and what are all the strategies to be applied for spending less’. Desire is the motivation, the want to do. What are we trying to achieve by spending less? How that is more important to us than spending more. In order to make something a habit in our lives, we have to have all three.

Unwanted Commitments:

You can’t avoid certain commitments like groceries, schools fees. But definitely you can discontinue unwanted commitments like the club membership in which you are not actively participating and not getting any actual use out of it; the chits impulsively you have enrolled with a jewelry shop.

Money not spent is saved. These above strategies will only work if you truly have a desire for future financial success. You need to be disciplined and persistent in the course of implementing these strategies. The more you practice smart spending,wealthier you become.


The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

Change is Inevitable – Need your views

Its getting close to a year of the existence of this blog on a self sufficient domain at melvinpereira.com, having its own sub domain blog.melvinpereira.com, and I have been trying to be consistent with the content coming on to this blog, including the very popular Wordless Thursday and other regular articles. In the past few weeks, the viewer-ship on the blog has significantly increased and I would attribute this to maybe increased awareness and an updated Google Pagerank as well.

Ηράκλειτος (Herakleitos; Heraclitus) of Ephesus way back in the times of the greek, had a very famous quote that people use until this day.

“The only thing constant in the world is change”

And considering this I have decided to add more diversity in content, am also going to be working on a theme to change a bit of the look and theme of the site including some changes in the plugins that I am using etc, to help make the site a bit faster (yes I do realize that its slow at times). More changes will be bought over in some time, however for a start I have started to include Guest posts now, posts that stay within the realm of inquisitive and interesting but could be from different fields and not only confined to technology. The first two guest posts are already here on the blog and you can see them here :

Guest Post – Mutual Fund Myth Buster

Guest Post – How to create a workable budget that gives you money and life?

More importantly, I have been requested by some students and kids (surprisingly who read my blog) to write about careers and what they might entitle, in terms of the work that they are doing, what people would need to do to get into that industry etc. I hope that this section would really help some of these students and kids who are reading this blog. The new section named “Inquisitive Interviews” will feature weekly some interesting everyday people with varied job profiles helping students make informed decisions on their career paths, from people in those industries. I have already requested some of my friends from different fields to actually feature in this section and it will start in a few days. Please let me know of what you think about the sections and the content in them.

A shout out to the regular readers, any suggestions and comments are really welcome to help make this blog interesting and inquisitive enough for all of you. Waiting for your responses …

Guest Post – Mutual Fund Myth Buster

Rajiv is working for a mutual fund house. They have recently came out with an NFO (new fund offer). The day on which the fund house announced its maiden NAV (net asset value), he received lot of calls from investors asking why the NAV is at below par. They thought something was wrong. Then Rajiv went on clarifying them that though both an equity fund and a stock extend market-related returns, there are some key differences between the two. If you have similar misconceptions about equity funds and stocks, this article will demystify all those misconceptions.

New Fund Offerings:

A new fund offer is not likely to generate amazing returns as can be the case with an initial public offering from a company. This is because the NAV reflects the market value of the stocks held by the fund on any day. Because a fund holds several stocks in its portfolio, the NAV can only reflect the combined returns on the portfolio between the NFO date and the date of first NAV.

The first NAV declared by a fund can, at times, be lower than the par value of investment. A lower NAV does not mean a cheaper fund: Just because a New Fund is issued at Rs 10, it does not mean it has a chance of giving better returns than an existing fund that has a higher NAV. Whether the scheme in which you are planning to invest has an NAV of Rs.15 or Rs.150 does not matter at all.

There is a difference between the price of a listed security and the NAV of a mutual fund scheme. Listed security has a price, determined by the demand and supply of the security. Whereas the unit’s NAV of the scheme has a value determined mathematically, by the prices of the securities in the portfolio. If the portfolio appreciates by 10% Rs.15 NAV will become RS.16.5 and Rs.150 AV will become Rs.165. So in whatever the NAV you invest your investment will fetch you 10% return.

So instead of concentrating on LOW NAV and more number of units, it is worthwhile to consider other factors (performance track record, fund management, volatility) that determine the portfolio return. A fund with higher NAV may give higher returns than a lower NAV fund, if its stocks did better in the markets.

Funds Vs Stocks

Point of distinction Equity Fund Stocks
Level of Risk High Highest
Entry/Exit cost No Entry Load; But there will be Exit load. Advisory fee may be applicable. Demat a\c and Brokerage charges
Options Options available like dividend payout, dividend reinvestment, growth. No such options
Minimum Investment Min investment is usually Rs.5000. Even one share can be bought.
Measuring Performance Returns Vs Benchmark Net Profit margins/EPS
Sub-division Classified based on stocks in which it invests. (Diversified, Midcap, sectoral, thematic) Classified as per the industry in which it operates.(FMCG, IT, PSU, METAL)
Pricing Based on the price of the underlying securities Based on the demand and supply of the particular stock

Dividends are not extra returns:

Immediately, after the dividend payment of dividend the NAV of the fund will fall to the extent of the dividend payment. Let us illustrate.

Fund’s cum dividend NAV is Rs.25. Proposed dividend is 50%. You are investing Rs.1 Lac and you will not get Rs.50000 as dividend. It is only Rs.20000 (50% on the face value Rs.10 is Rs.5 per unit) as the unit price is Rs.25 you will get 4000 units. Rs.5 dividend * 4000 units=Rs.20000.

And this dividend is not an additional gain or income. After payment of dividend the NAV of the scheme will fall to the extent of the payment and distribution taxes (if applicable). Now your nav will become Rs.20 and your investment value will be Rs.80000 (4000 units * Rs.20 NAV).

In a nutshell,

Investment amount   Rs.1,00,000

Dividend amount     Rs.  20,000

Present Value      Rs.  80,000

It is nothing but investing Rs.80000 after dividend distribution at NAV Rs.20.

So investing in a scheme because it is declaring dividend in the near future is meaningless. Usually a company with a liberal dividend policy may enjoy greater investor interest in the stock market. The same is not applicable to an equity-oriented mutual fund.

Investing more number of funds is not actual diversification. It may reduce your return.

Owning several mutual funds doesn’t necessarily broaden your holdings. It will be a mistake to buy the same securities over and over again in different funds with different names. You tend to believe they’re diversified. But it is not real diversification.

There are only very few funds which are performing consistently. Instead of investing in few funds, if someone chooses to invest in more number of funds (because he intends to diversify) he may be forced to choose some average performing schemes also. As a result his returns will be diluted. The step taken by the investor to diversify his investment is not leading to diversification but to dilution of return.

Thus ideally your portfolio should not have more than four-five funds.

NO tax for churning:

When we buy shares and sell them within a year we are accountable for short term capital gain tax at the rate of 15%. But mutual funds provide the benefit of churning of stocks with no tax implications. A fund which churns its portfolio within a year is exempt from tax because it only redistributes these profits to investors.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.