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Posted: 19 Sep 2014 04:54 AM PDT
Recently, while going through my set of business dailies, I found many experts commenting about the recent bull-run in the Indian equity markets. And I found a striking similarity between a bull-run and a Marathon. Both, Marathon and Bull-run can be broken down into three phases. I have jotted down a few points that I feel are analogous, read on:- (Bull run in italics)
Marathon, Initial 14 kms: You have to be strong and confident to take up this challenge. You have to trust your ability and prepare mentally to finish the task at hand. Start slow, running slow is the key to enjoy and complete the marathon. Remember, the hare and the tortoise story? Don’t worry about the people who have passed you starting way too fast. These people will get eliminated anyways due to early fatigue. Don’t get obsessed with winning or thinking about your reputation.
Bull-run Phase 1: Markets start moving up just in anticipation of growth. Similar to a marathon, don’t hurry to jump in markets. You need to identify core sectors within your circle of competence which are likely to flourish or turnaround. You need to assess the impact of macroeconomic fundamentals on these sectors. Don’t get carried away with your friends and colleagues who insist you to invest just based on intangible factors like Modi Sarkar, Y2K, etc. Don’t think about missing the rally. Keep in mind that we need only 4-5 stocks ideas which will yield us the most during this bull-run.
Marathon, Next 14 kms: Look at marathon in small parts. View it as small task rather than total distance left. Remember, the marathon is more of a mental challenge than physical. Don’t get restless or doubt yourself about the outcome of the race. Don’t look at people who are going ahead. Keep yourself focused on your mission. One of the strategies may be to engage yourself in things different than marathon itself. Look around at the shops, malls, gardens or listen to songs or simply think of the best moments in your life.
Bull-run Phase 2: Similarly, keep in mind that market is there to serve you and not dictate you. You just have to pick cherries and carry on. Investing is more of a temperament than a technical ability. You have to align your thought process in lines with your knowledge and past experience. The curious mind will definitely pop-up some ideas which will help you make investment decisions. Reason out your instincts. Invest only in those companies which are going to benefit from the revival of economy. Many companies will announce above average results, but be patient and rational in differentiating the real growth vs the nominal one. Don’t get baffled looking at below average companies making into gainers’ list. They are inching upwards simply because of liquidity in the market or blatant anticipation. Remember, positive sentiments don’t put cash into your wallet. Do not distract yourself with all short term statistical data and index value forecast circulated around. Rather than news articles and brokerage reports, read more on the upcoming industries and sectors. Learn about the current trends and overall consumption pattern of the growing economy.
Marathon, Last 14 kms: You will feel exhausted and uncomfortable. Try to focus on the achievers, the successful athletes and sportspersons. Remember how they claimed the throne by perspiration and confidence. Get inspired and put yourself in their shoes and move on. Keep telling yourself that you are an achiever. You won’t settle for anything less than victory. By now, many will probably quit the race. If you follow the above advice, probably you are among the top 10% people. You just have to beat the ones who are leading you. Take hold of what you deserve after so much patience and hard work. Live every moment till the end of the summit.
Bull-run Phase 3: You will get excited looking at how your investments blossom. Do not get thrilled with high returns. Do not enter the market at these levels. Recollect and recite the quotes of the legendary investors on greed and self-content. Aiming to achieve above market returns will horrify the end results. There is only one way the market will go from here, down. Become more practical and listen to your mind. The market prices might have factored in 30%, 40%, 50%+ future earnings growth rate. Make a conscious effort to identify which companies will operate at those growth rates or slightly below it despite some slowdown in future. There are few companies which are defensive and will continue outperforming the market. Retain these low risk companies in your portfolio. If you feel few companies in your portfolio have rallied above their valuations, considering selling a portion of it. It is always good to book profits at these levels rather than carrying a downside risk or loss of profits. Many people will influence you not to book profits and continue investing. These people are trodden by greed. Greed is good when it is based on facts and figures. Greed is bad when it is notional and manipulated. Do not envy others who are betting on 50%-75% returns. Feel proud of yourself that you have made reasonable returns with minimum risk as opposed to others. Take control of your emotions. Charlie Munger, the legendary investor, says “What good is envy? It’s the one sin you can’t have any fun at. There are two keys to success, mastering emotions and taking good decisions.” Sincerely translating the above principles into your actions will lead to paramount success. Sky is limit, just go grab it.
“In your life you only get to do so many things and right now you’ve chosen to do this, so make it great.”- Steve Jobs
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Tuesday, 23 September 2014
An Athletic approach to stock market investing
Nifty at 10000 in 12 months?
Dear All,
Please find below a good analysis on whether Nifty will hit 10000 in the next 12 months by Mr. M Pattabiraman a IIT Physics professor for your reference and understanding:
Nifty at 10000 in 12 months?
Nifty at 10000 in a year? Before the next budget? Pretty sure most of you must have seen such headlines somewhere. Here is a layman’s attempt at trying to figure out if these projections make any sense.
Nifty vs. EPS YoY Growth Rate
First let us look at the way in which Nifty earnings per share (EPS) has grown year on year (YoY). To calculate this, first the EPS is computed (closing price divided by index PE) and then the growth rate is rolled over 1 year intervals.
Notice that the EPS growth rate (right axis) has been quite range bound in the last 5 years. Looking at past growth rates during rallies, it seems to me that the rate at which Nifty has risen in the past 12 months is not as rapid as one would suggest. The rise is a sight for sore eyes, but one cannot trust sore eyes to make sound judgement.
Nifty EPS vs. Nifty PE
The nifty EPS (left axis) has pretty much increased at a steady pace of about 12% per year since Sep. 2002, barring the period during the 2008 crash and recovery. More on this here: State of the Markets – April 2014
So I think one can safely project it for the next 12 months, assuming the same rate of growth (red line).
The EPS on Sep. 16th 2014 is ~ 376.
Projected EPS on Sep. 16th 2015 is ~ 397. Let us make it an even 400.
This corresponds to an EPS growth rate of about 6%.
This is perhaps a little too conservative estimate, but let us run with it.
Now if the Nifty touches 10000 on 16th Sep. 2015 for the first time, the PE corresponding to an EPS of 400, will be 25.
Meaning: close to what experts would call, “extremely high valuations”.
Therefore, if the Nifty hits 10000 in the next 12 months with an annual EPS growth rate of less than 10%, the PE will become dangerously high. Meaning the so called ‘bull run’ will sooner or later come to crashing halt.
If the Nifty has to breach 10000, and stay there for a decent amount of time, the PE will have to be much lesser than 25.
If we assume the PE in a year to be about 22 with Nifty at 10000, the EPS has to be ~ 450.
This means that the EPS has to grow by 20% from what it is today (16th Sep.).
Since the EPS has grown only by 8% in the last year, I am not too optimistic that there would be such a sudden surge in growth.
The current PE is ~ 21 (10Y average ~ 18.9). So even if the Nifty is at 10000, the PE is likely to be much higher than 22 as assumed above.
Let us hope/pray that I am proved wrong and that the Nifty comfortably breaches 10000 in a year and heads further northward 
The shortest guide for a 22 yr old to start investing his money ? : Jagoinvestor
Posted: 21 Sep 2014 09:44 PM PDT
I was on Quora some days back when I came across an answer by Yuvraj Wadhwani on a thread called “How should a 22-year-old in India invest his/her money?” . It was such a beautiful answer and loaded with awesome advice to someone young to start their financial journey in life.
I instantly contacted Yuvraj, if he would like to guest post his answer on Jagoinvestor and He replied back saying he would be glad to do so. So I am putting up his answer to that question here on this blog for everyone . Read it from start till end. Its a bit different in style, but really worth .
Note : I have realigned some lines and combined them together to make proper paragraphs.
OK let’s begin with wise words I learned a while back.
The principle of “Divide Investing in 3 plans”
It took me a while to get this, but it is really empowering to understand this principle. It is wise to divide investing in 3 plans.- Plan to be secure
- Plan to be comfortable
- Plan to be rich
1. Plan to be secure
Buy a big term insurance policy and don’t look at market linked insurance plans (ULIPs). Set aside some money and trust that your financial planner will do a good job with it. Also, set aside some money (~3 month’s salary) as an emergency fund. Once you set this up, this should be an automatic plan that doesn’t require your time or effort.
I think everyone should have a plan to be secure. Now, before going to the second or third plans, ask yourself this question..
“Do I want to be comfortable or do I want to be rich??”
This is a very important question as it will probably determine what you do while following your plan. It’s similar to setting up your goal before buying a gym membership. You may choose to have a light jog on the treadmill, or work out heavily with weights. You choose what you do.
Now read on, I hope after reading you will make a more informed decision about which plan is right for you.
2. Plan to be comfortable
The plan to be comfortable should be pretty straightforward for everyone. If you are a salaried personnel, then you save a portion of your income. You use 80cc to minimize your taxes, invest in diversified mutual funds, SIPs, or recently infrastructure bonds, or specific stocks if you have a good education.
You also have a financial planner who can give you advice for specific funds, or who can tell you to rupee cost average your investment. You also makesome money of “hot tips”. If you follow this plan, you should live and retire comfortably. There is nothing bad/wrong about choosing this plan, just as there is nothing wrong with going to the gym for a mild jog. It’s an individual choice. Most individuals would find themselves in the comfortable zone. I encourage all of those people to read further as well.
3. Plan to be rich
Extracted from a book
Q: “What’s your advice for the average investor??”Average investors make money when the market goes up and lose it when the market goes down. Average stock traders don’t make money. (They don’t lose, but don’t make it either). When the market crashes, the average investor loses the maximum.
A: “Don’t be average”
Why? Because the average investor is a slave to the market.
Successful investing is not about the investment, it’s about the investor.
This is perhaps the least understood concept of investing. This is the reason why people ask questions like “Where should I invest my money?” and the most accurate answer to the question is the question..“I don’t know, are you a good investor?”
Let me give you an example – “What happened during 2008-2010 in stocks worldwide? Everyone knows they crashed right? Everyone who was invested in stocks lost money right??”
WRONG!
John Paulson’s , a hedge fund manager , made more than 15 Billion $ for his company in 2007. (That’s a billion with a B). That money is almost equal to 80,000 crores.
Many claim that he made around 4-5 Billion Dollars of personal money during (2007-2010). That’s more than 20,000 crore rupees. While this was claimed the greatest trade ever, the point I am making is that it is entirely possible to make money when the market is going up and down.
So what are the differences between average and rich (above average) investors?
Simply stating, successful investors have 3 E’s that average investors don’t have.
- Education
- Experience
- Excessive Cash
A successful education starts with a good mindset. A successful investor has much more education than the average investor. A successful investor is committed to getting better and better with their education. How do you define commitment?
Do you know that friend of yours who plays the guitar? Do you know who else plays the guitar?
Got it ?
One of the differences between them is their commitment to playing. So how is the mindset of a successful investor different from an average investor? Let me draw a diagram to better explain. In the world of business, there are 4 kinds of people
- Employees
- Self Employed
- Business Owners
- Investors
Simply put, average investors think from the left side on the diagram and rich investors think from the right side of the diagram. Does that make a lot of difference, you may ask?
The answer is YES.
Let me put forward a few myth busters to put it in perspective.
(Avg Investor): My house is my biggest investment.I am not saying what the average investor is saying above is bad advice, but it is average advice. As I mentioned, average investors make money when the market goes up and lose it when the market goes down. And if you have been reading till here, then you might be interested in making money whether the market goes up, down or sideways.
(Rich Investor): A house is a liability
(Avg Investor): Diversification reduces risk
(Rich Investor): Diversification is de-worsify-cation (Warren Buffett quotes)
(Avg Investor): Stock market is risky
(Rich Investor): Risk comes from not knowing what you are doing
(Avg Investor): Avoid risk
(Rich Investor): Take more control and manage risk
(Avg Investor): Real estate never comes down (extremely popular in India)
(Rich Investor): All markets go up and down
(Avg Investor): Saving money is good
(Rich Investor): Saving money pays maximum ~8% before tax, inflation is ~10%, so saving money is a guaranteed loss.
I could go on, but hopefully you get the point.
Also, if you find yourself arguing against the Rich Investor statements, that means you too are thinking from the left side of the quadrant.
So, how do I educate myself for being a rich investor?
- Books
- Tapes
- Workshops
- Mentors
2. Experience
This should be a no-brainer. How do you get experience? By applying what you learn. Start small as mistakes will happen. If you stay on track it will become easier and easier. It might feel like trying to eat with your opposite hand. In the beginning, you will spill your food, you will be frustrated and probably won’t be satisfied, but in time you will learn it eventually.
3. Excessive Cash
This is the tricky part, but if you have educated yourself well, and have gained good experience, then excessive cash (or some cash) should already be rolling.
A note on the ultra rich
The rich investors invest in assets (stocks, bonds), but what do the ultra rich invest in?
The ultra rich don’t buy assets, they create assets. This is the secret how the richest people in the world created their wealth. They created an asset which millions and millions of people want to buy. Bill Gates created Microsoft, Larry Ellison created Oracle, Warren Buffet created Berkshire Hathaway.
Final Words
Q: “How should a 22 year old Indian graduate invest money?”Cool, this is what I would recommend.
A: “I don’t know, are you a good investor?”
All right, you have my attention, now how do I get started?
Knowledge begins with words.
What does that mean? Let’s take an example. Many times when you travel, you meet people or are around strangers and you hear them talk. Most of the time you can guess their professions. Have you wondered how?
It’s by the words they choose and say.
I evaluated the students and the grades are good.So the lesson here is that if you want to excel in any field, you must learn (hopefully master) their words. And you know what, words are free! (yeeiiiii)
(Teacher)
My boss is not a good person.
(employee)
I shorted that stock as the P/E ratio was high.
(stock market trader)
That patient had to be given a muscle relaxant.
(Doctor or medical professional)
So tell me if you understand any of these words.
- P/E ratio
- Volatility
- Bull Market
- Bear Market
- CAGR
- Y-o-Y growth
How?
- Read your business newspaper.
- Listen to the market news.
- Use google.
Let me tell you a secret
Most of these complex sounding words are actually simple concepts. Really???Let me tell you the job I had previously. I was Production support analyst for a retail POS application for a telecommunication company which sold products in multiple verticals. Only the job title is complex. So why do all these finance companies and news channels use these fancy titles and words? Because they want to sound smart, and want to sell you stuff.
So when you start learning words, you’ll understand the bullshit most TV channels and financial advisers preach as “investment advice” is really sugarcoated salesmanship.
So when the next time you read an investment advice column and say, “That’s nonsense”, Congratulations, you are making progress. If you are reading this, that means you don’t want to be average. So I encourage you to take the next step in your education and start learning words. I’ll try to help as much as I can.
Thanks Yuvraj Wadhwani for giving permission to publish his quora answer on this blog and share his knowledge
Wednesday, 17 September 2014
rich dad poor dad
Greetings bhavesh,
This is my second email I’ve written to share some of rich dad’s lessons and to address the unemployment concern. The government is too afraid to tell the truth of the nation’s rampant unemployment, the highest seen in decades. While it would be nice to believe the government figures, I think we all feel that things are not good. The economy is worse off than they are saying.
I promised to share some of rich dad’s lessons. The difference between my rich dad’s advice and what they teach in school is simple. School always says, “Go to school and get good grades so you can find a safe, secure career with benefits.” My rich dad’s advice was, “If you want to be rich, you need to be a business owner and an investor.” My problem was that school did not teach me to own businesses or to be an investor.
One day after school, I was working in my rich dad’s office. I was about 15 years of age at the time and was very frustrated in school. “Why don’t they teach us about money in school?” I asked him.
“I don’t see any relevance between what we are required to study in school and the real world,” I continued. “I just want to learn to be rich. So how is dissecting a dead frog going to help me get a new car? If the teacher would tell me how a dead frog can make me rich, I would dissect thousands of them.”
Rich dad laughed aloud and asked, “What do they tell you when you ask them about the relationship between dead frogs and money?”
“They say, ‘You need to get good grades so you can find a safe secure career,’” I replied.
“Well that is what most people want,” said rich dad. “Most people go to school to find a career and some kind of mythical supernatural financial stability that they were told about in bedtime stories.”
“But I don’t want to do that. I don’t want to be an employee working for someone else. I don’t want to waste my life having someone else tell me how much money I can earn or when I can go to work or take a vacation. I want to be free. I want to be rich. I don’t want to work for someone else.”
There is so much more to rich dad’s lessons. Realizing that being an employee won't free you is not the lesson here. You must free yourself, and you can’t do that with what is taught in school.
Next I’ll explain that the solution to the problem is also the solution to success and wealth. No matter what goes on in the world, you can succeed. Thank you for reading. If you find value in these emails please share them with your friends.
To making life better,
Robert Kiyosaki
Monday, 15 September 2014
Quicker-than-expected US rate hikes?
Dear All,
Please find below a good article as appeared in Mint for your reading:
Quicker-than-expected US rate hikes?
The specter of US rate hikes has come a step forward, with the publication of a report by the Federal Reserve Bank of San Francisco that said investors were not on the same page as the US Fed on rate increases. The report concludes, “On balance, our evidence indicates that the public seems to expect more accommodative monetary policy than the SEP (Summary of Economic Projections by the US Fed) suggests. US bond yields have moved up, with the two-year treasury yield at the highest in the year, as chart 1 shows.
The US dollar has strengthened, because while Europe and Japan continue to ease monetary policy, the US is preparing to tighten. Emerging market currencies and markets too fell on Wednesday. A recent note from JPMorgan says: “We believe EM (emerging market) assets have priced in a gradual rate hike starting in mid-2015 but a more hawkish Fed could still be disruptive. But while the Indian currency too fell, chart 2 shows a decoupling between the rupee on the one hand and the euro and yen on the other, with the dollar losing a bit of ground against the rupee in the past month, while it has gained substantially against the euro and yen. This also reflects the distance the Indian economy has traveled since last year’s panic.
ELSS thro' SIP in Demat route
Dear Investors,
Greetings from Integrated.
FYI, updating herewith the performance details of select ELSS :
Greetings from Integrated.
Start your tax planning right now ... Invest in MF ELSS ... mainly thro' SIP ... that too in Demat route.
1. The investment limit eligible for IT benefit u/s.80 C is increased from Rs.1 lac to Rs.1.50 lacs in the recent budget (subject to
approval). Accordingly, you can now invest up to Rs.1.50 lacs in MF ELSS and save tax up to Rs.46,350/-.
2. ELSS is the only option where there are bright chances of tax free dividendsapart from likely capital appreciation. ELSS has the
lowest lock-in period of only 3 years among all tax saving investments.
3. By adopting SIP route, you are staggering your investments which brings down the risk sizeably. Not only that, investing
Rs.1.50 lacs at one stroke may be difficult for many. Systematic investment also brings lot of discipline.
4. You have the option of investing through our NSE terminals (apart from the traditional application form route) and units will get
credited into your Demat account automatically every month.
| Fund Name | Launch Date | Average AUM As on 30/06/2014 (in crores). |
NAV
As on 10.09.2014 (Rs.)
| Return as a % as on 10.09.2014 |
Value Research Rating
as on 10.09.2014
| |||
| Lumpsum | SIP | |||||||
| 3 Yrs | 5 Yrs | 3 Yrs | 5 Yrs | |||||
| Franklin India Taxshield - Growth Option | Apr - 1999 | 1158 | 363.58 | 21.68 | 18.14 | 22.82 | 16.39 | **** |
| HDFC Long Term Advantage - Growth Option | Jan - 2001 | 987 | 232.55 | 22.14 | 17.80 | 24.98 | 16.89 | **** |
| Principal Tax Savings - Dividend Option | Mar - 1996 | 228 | 132.00 | 25.95 | 15.06 | 28.00 | 17.89 | *** |
| SBI Magnum Taxgain - Growth Option | Mar - 1993 | 4372 | 102.68 | 22.95 | 14.82 | 24.63 | 15.99 | **** |
For more informations and application forms, kindly contact your nearest branch of Integrated.
Risk Factors : MF investments are subject to market risks. Pl. read, scheme information document carefully before investing.
Regards,
Integrated Enterprises (India) Ltd.,
Monday, 8 September 2014
5 terms to know regarding Indexation
Dear All,
Please find below a good article on basics of Indexation as appeared in Morning Star for your reading:
5 terms to know regarding Indexation
Indexation is the process that takes into account inflation from the time you bought the asset to the time you sell it. The way it works is that it allows you to inflate the purchase price of the asset to take into account the impact of inflation. The end result is that you get the benefit of lowering your tax liability.
Here are 5 terms to understand about indexation that will give complete clarity on how it works.
1) Inflation
Inflation erodes the value of the asset over time. Let’s say that you have Rs 5,000 as of today. Over 5 years, assuming an annual rate of inflation of 5%, its actual value would drop to Rs 3,868.
It is precisely for this reason that inflation is taken into account when computing tax on the difference between the buy and sell cost.
Of course, that is just one aspect of it. Inflation also eats into the returns from the investment. For example, let’s assume you open a 2-year fixed deposit earning 9% per annum. Should inflation move from 5% to 7%, the effective yield decreases by 2%. Take taxes into account and the result is even more dismal.
2) Capital gains
When you sell an asset, you often make a profit on it. This can be any asset - property, stocks, bonds, mutual funds, art, gold, and so on and so forth. This profit is known as capital gains. It is further split into long-term and short-term capital gains.
If you sell the asset after holding it for a period of 36 months, it qualifies as long-term capital gains. In the case of stocks and equity mutual funds, the holding period to qualify for long-term capital gains is just 12 months.
If you sell the asset before this period, then it qualifies for short-term capital gains.
3) CII
The Cost Inflation Index, or CII, is an inflation index tool used to measure the rate of inflation in the economy. The value of the index is determined by the central government and is increased every year to reflect inflation. With FY1981-82 as the base (CII=100), it was fixed at 939 for FY2013-14.
4) Indexed cost of acquisition
To arrive at this, one has to take the CII for the year in which the asset is sold and divide it by the CII for the year in which it was bought.
So let’s say you bought an asset in 1996-97 (CII = 305) and sold it in 2004-05 (CII = 480). That would amount to 1.5737.
This is now multiplied by the cost of acquisition to arrive at the indexed cost of acquisition.
So let’s assume you bought it for Rs 2 lakh and sold it for Rs 4 lakh. Hence 2,00,000 x 1.573 would amount to Rs 3,14,740. This is your indexed cost of acquisition.
Capital gains would now equal to the indexed price being subtracted from the selling price of the asset: Rs 4,00,000-Rs 3,14,740 = Rs 85,260.
5) Capital gains tax
Let’s continue with the above example. If you just blindly deduct the cost price from the sale price (Rs 4 lakh – Rs 2 lakh), you would land up with a capital gain of Rs 2 lakh. However, that is incorrect since you need to take inflation into account. Once you do so (by following the process detailed above), the capital gain narrows down to Rs 85,260 (Rs 4 lakh – Rs 3,14,740). Hence the amount on which you eventually pay tax is considerably lessened.
The tax paid on this capital gain is referred to as capital gains tax and at 20% with indexation it will be calculated as 20% of Rs 85,246.
Friday, 5 September 2014
Vital decisions for retirees
Dear All,
Please find below a good article on 'Vital Decisions for Retirees' by Bruce Cameron for your reading:
Vital decisions for retirees
Managing your finances and planning for your future do not end when you retire. If anything, you need to be more active in managing your money, because mistakes made in retirement can be far more damaging than pre-retirement slip-ups.
This is the view of Bruce Cameron, the former editor of Personal Finance, who spoke at the Alexander Forbes/Personal Finance Ready Set Retire Club.
Cameron, who is semi-retired, says you make your most crucial financial decisions immediately before and immediately after you retire. You cannot afford to make any mistakes, because it is unlikely that there will be another opportunity to get it right. You have to make decisions about a range of important issues, including what you want to do in retirement and how to structure your income, he says. The main issues you need to consider are:
Your retirement date
Cameron says that, by the time they retire, very few people have saved enough capital to support their pre-retirement standard of living. This means they must postpone their retirement, reduce their standard of living, depend on the assistance of others and/or find another form of employment “in retirement”.
If you are an employee who belongs to an occupational retirement fund, you have little say over your retirement date. To make matters worse, in some cases employers force employees to take early retirement.
“This means you need to start calculating long before retirement whether you can actually afford to retire and what you will do to make up the shortfall in capital. It is not something that can be left for the day you retire or are ‘retired’ by your employer,” Cameron says.
The best way to assess whether you can afford to retire is by calculating the percentage of your current income you will need as an income in retirement. This is known as your replacement rate (or ratio).
Calculating your replacement ratio is not a once-off exercise. It should be done at least annually, or whenever an event has a significant impact on your income and assets.
Debt at retirement
You must pay off all your debt before you retire, Cameron says. Do not use your retirement savings to repay debt, because this will make it even more difficult to generate the income you need in retirement.
Your expenditure
The biggest threat to your finances is living beyond your means or having to fund a large expense for which you did not provide.
Before you retire, you must establish how much you can afford to spend in retirement. This includes calculating:
* Your current and future after-tax cash inflows (income) and cash outflows (expenses);
* How much you need to save to cover expenses that are likely to increase above the rate of inflation, such as medical costs; and
* What you have in reserve (your assets) and debts (liabilities). Your reserves should include an emergency fund equal to between three and six months’ income.
After you retire, you need to:
* Keep a tight rein on your spending to ensure that you do not exceed your budget. When drawing up a budget, be careful not to understate what you are likely to spend.
* Keep saving. As you age, your living expenses may increase if you have to spend large amounts on health care, while inflation may reduce the buying power of your pension. The way to address this problem is to keep saving.
Pension decisions
By the time you retire, you need to have decided how you want to invest your savings to generate an income, Cameron says.
At least two-thirds of any money from a defined contribution retirement fund or retirement annuity must be used to buy a compulsory annuity (see “Your pension choices when you retire”, below). Any discretionary savings can also be used to generate an income.
The main difference between compulsory and discretionary investments is how they are taxed. With a compulsory annuity, you pay income tax on your pension (including any capital you draw down) because you receive tax benefits on your savings while they accumulate in your retirement fund. On income from discretionary sources, you pay tax only on interest, dividends or rental earnings, but not on any capital you withdraw.
Cameron says you may belong to a retirement fund that provides you with a pension (a defined benefit fund). If this is the case, in most cases the pension will end on the death of the last-surviving spouse.
You need to find out how your fund will award pension increases. Most defined benefit funds award average annual increases of 75 percent of inflation, which means the buying power of your pension will decrease. If you do not have other savings, you will have to save some of your pension to keep up with inflation as you grow older.
Investment markets
You will have to make investment decisions if you have discretionary savings or a living annuity, Cameron says. This means you have to:
* Understand the basics of investing.
* Adopt a conservative investment strategy and diversify across the main asset classes of equities, bonds, property and cash.
* Be on your guard against scams and high-risk investments. Retirees are the number-one target of people who sell high-risk investments. You cannot afford to gamble with your savings in the hope that you will receive high returns. For example, thousands of pensioners have been burned by property syndications, which promised higher monthly incomes than guaranteed annuities. But the investors not only received little or no income; they also lost some or all their capital.
* Select products that enable you to take advantage of tax breaks.
Longevity
Many financial plans that include living annuities are based on the assumption that a person who retires at 65 will die at 84, but 50 percent of pensioners will live longer, Cameron says.
One person in a couple aged 65 has a 52-percent chance of reaching age 90. Against this, a living annuity with real (after-inflation) growth of three percent a year and an initial annual drawdown of five percent has a 25-percent chance of lasting until the annuitant turns 90.
Investment costs
High investment costs can ravage your income in retirement, Cameron says. One percentage point may seem low in the saving stage, but every percentage point saved in costs will increase your final benefit by 20 percent after 40 years.
Inflation
Cameron says if you are 65 now and have an income of R20 000 a month, to keep pace with inflation of six percent a year, you will need double that amount when you are 77. You will have to lower your standard of living if inflation rises at a faster rate than your income.
Accommodation
Deciding where you want to live in retirement may include downscaling, Cameron says. You should take a number of factors into account, including the cost of maintaining your existing property and the type and location of a retirement village where you may want to live. Do not leave this decision until you are forced to sell because you can no longer afford the upkeep and rates.
Physical and mental health
Poor health, particularly poor mental health, is a significant threat to your financial security in retirement, Cameron says. You must plan for lifestyle changes that result from ill-health.
Estate planning
You should make your standard of living in retirement your priority, not how much you want to leave to your heirs, Cameron says.
However, you should make provision for people who depend on you now and who will depend on your estate after your death.
Tax
Cameron says you need to make a number of tax-related decisions before retirement and in retirement. These decisions include how much of your retirement savings to withdraw as a cash lump sum at retirement and how to invest discretionary savings.
Advice
One of the biggest threats to your financial security in retirement is receiving bad advice, Cameron says.
The most trustworthy advisers have the Certified Financial Planner accreditation and are members of the Financial Planning Institute.
To find a qualified planner in your area, go to www.fpi.co.za
YOUR PENSION CHOICES WHEN YOU RETIRE
If you must buy a pension, your choice is mainly between a guaranteed life annuity and an investment-linked living annuity.
Guaranteed life annuity
This is a pension provided by a life assurance company. The pension you receive depends on:
* Your age. The older you are, the more you will receive, because your life expectancy is shorter than that of someone younger than you. For example, a man who buys a level pension with R1 million at age 55 will receive almost R8 000 a month, but he will receive almost R10 500 a month if he buys the pension at 70.
* Your gender. Women receive a lower pension for the same amount than men, because women, on average, live longer than men.
* Interest rates. Most of your money is invested in interest-bearing investments. When you buy a guaranteed annuity, the calculations for the pension are based on the prevailing interest rates.
* Choice of annuity. There are a number of types of guaranteed annuity. The more bells and whistles, the lower your initial pension will be, but the pension will be more sustainable as you get older.
Once you have bought a guaranteed annuity, you cannot change your mind: you have entered into a contract which ends only on your death or the death of your surviving partner.
The main choices of guaranteed annuity are:
- Level. You are guaranteed the same monthly income for the rest of your life. Inflation will rapidly reduce the buying power of your pension. An inflation rate of six percent a year will reduce the buying power of your pension by 25 percent every five years.
- Escalating. Initially your pension will be lower it would have been had you chosen a level annuity, but an escalating annuity that increases by 10 percent a year exceeds a level annuity after nine years.
- Guaranteed and then for life. Your capital is guaranteed for a certain period. If you outlive the period, your pension will continue to be paid until you die.
- Joint and survivorship. These pensions are paid until the death of the last-surviving spouse. You decide whether you want the pension to decrease or stay the same after the death of one partner. The higher the pension required for the surviving partner, the lower the initial pension.
- With-profit annuity. These pensions are guaranteed, but the increases depend on the investment returns. The main features are:
* The initial pension is guaranteed for the rest of your life;
* The increases are based on the returns earned on the initial investment, less costs and the profits taken by the life assurance company;
* The increases are declared as bonuses and are guaranteed for remaining contract period; and
* The increases are smoothed, which means that some of the returns earned when markets are performing well are held back to pay better increases when markets are performing poorly.
Investment-linked living annuity
This is an annuity provided by an asset manager or investment platform. The main features of this type of pension are:
* You must draw between 2.5 percent and 17.5 percent of the value of your capital annually. If you withdraw more than five percent initially, depending on your age, your capital is unlikely to last until you die.
* You choose the investments, which means you need to be conservative in your choices, because volatility or market slumps will undermine your capital and your pension.
* You take the risk that there will be sufficient capital to maintain your standard of living until you die.
* The residue of your capital goes to your heirs when you die.
What’s best?
Cameron says you must take a number of factors into account when deciding which type of annuity to buy. These factors include:
* Your age. Low guaranteed annuity rates are paid to young annuitants, but the older you are, the better the rate, so a living annuity may be the better option if you retire relatively young.
* Interest rates. The higher the prevailing interest rate, the higher the guaranteed pension will be, and this higher rate is “locked in”.
* Longevity. A guaranteed annuity is a form of insurance in case you live longer than expected.
* Responsibility. If you have a living annuity and suffer from dementia, you are at risk of self-inflicted losses or fraud.
* Switching products. You can switch from a living annuity to a guaranteed annuity, but once you are in a guaranteed annuity you cannot switch out of it.
Monday, 1 September 2014
AVERAGE PERFORMAR
#1. Average performers love to talk about others. Iconic producers are obsessed with discussing their dreams. #2. Average performers adore leisure. They know the hot tv shows, spend their finest hours playing video games and are first among friends to secure the latest gadget. Iconic producers are vastly different…their addiction is learning. They invest in books, go to conferences, mastermind with masters and do whatever it takes to make their tomorrows better than their todays. Please remember: the more you know, the more you can achieve. Knowledge is the greatness creator. #3. Average performers resign themselves to mediocrity, thinking that the elite are somehow smarter, faster and cut from a different cloth. I call this The Myth of Genius. Don’t buy into it. Iconic producers have a different perception. They get that genius and legendary is not the result of divinely-orchestrated talent. Nope. It’s a lot more about focus, discipline, sacrifice, suffering, stamina and ridiculous amounts of hard work. They get that rising to world-class is never easy. But it’s always worth it. #4. Average performers disrespect time. You’ll see them waiting hours for a great table in a cool restaurant. They buy groceries when everyone else buys groceries. They are often late and known for procrastination. Iconic producers understand that time is a blessing. They use their best hours for their most important pursuits. They have a clear written plan for the next 10 years, 5 years and this year. They schedule their days, knowing that structure is the doorway into freedom. #5. Average performers use victimspeak. Everything is “a mess” or “trouble” or “a problem”. But the words you use drive the energy you feel. And to rise to exceptional, you need to tap into your natural reservoir of massive energy. So iconic producers leverage their words to raise their games. Their language inspires. And reveals the fact that–deep within–they view themselves as captains of their fate versus powerless little pawns. #6. Average performers stop when they’re scared. Iconic producers press ahead when stricken by fear, understanding that persistence is the DNA of becoming a game-changer. And that bravery is the result of practice versus a natural gift. #7. Average performers follow the crowd. Their dominant focus is to fit in, be liked and receive tribal acceptance. Iconic performers care not what others think. They’ve developed the confidence to think for themselves. They set their own dreams, run their own values and march to their personal drumbeat. That not only causes rare-air success. It produces enduring happiness. #8. Average performers are pleasure-driven. Everything they do is about fulfilling their desires and feeling good in the moment (often done as an escape from the pain of potential betrayed). Iconic producers are purpose-driven. They are fuelled by their Mighty Why–that singular and gorgeous vision of a bigger future that keeps them up late and gets them out of bed early. They viscerally understand that the secret of passion is purpose. And that once you articulate your why, the hows automatically present themselves. #9. The average performer is pure consumer. It’s all about buying and having things. Their self-identity is based on the brands, labels and badges of the moment. Iconic producers care very little about stuff. What stokes their fire has less to do with being a consumer and a lot more to do with being a maker. For them, their compelling cause is all about using their creativity, energy, talents and time to produce value that not only delivers their personal dreams but makes the world a greater place. I sincerely hope these nine points inspire, help and serve your rise. Your time really is now. My respectful suggestion: release all excuses, reasons, rationales and resentments. Today’s a fresh canvas. A new beginning. And your beautiful opportunity to step into the life you ache to live… - See more at: http://www.robinsharma.com/blog/08/the-last-days-of-average/#sthash.T2P69iQ8.dpuf
How Financial Ads can mislead you?
Dear All,
Please find below a good article as appeared in PrudentFP Financial Literacy by Mr. Suresh Kumar Narula for your reading:
How Financial Ads can mislead you?
Many advertisements on financial products are being seen on the television or read on the newspaper and magazines where numbers are tweaked and framed in such a way, that the financial product looks very attractive as we get excited and not-to-miss an opportunity! We are flawed to see the advertisements and nothing seems wrong to us because a bit of creativity and lot of embellishment of the numbers are flummoxed by the high yield indicated in their posters or banners. These financial ads are enticing you to invest in them on the pretext of tax saving, retirement planning or children’s future etc. Whilst encountered with these products, you need to be careful not only about the taxation aspect but also indicated returns, leaving you impoverished in your old age if you go by their attractive but misleading ads today.
At this juncture, you must be as an investor and we as financial planners should get alert about such misleading advertisements because such big institutions and banks are indulging in a highly embellished communication of doubtful veracity
Misleading or partially true advertisements
We came across a few advertisements in several media including the Company’s website, their innovative approach are misleading to push a faulty product down the throat of gullible people.
One of the leading insurance companies has launched TV and print advertisement proclaiming that its pension plans offer ‘retirement plans with super benefit’ with a tagline “Taaki kal bilkul aaj jaisa ho”. The translation: “so that tomorrow may be just like today” – in terms of financial well-being. The print ad has catchy pictures with phrases like “Will your 63rd birthday be as grand as your age 36th ?” and “Will your exotic vacation plans retire with you?”
What is the problem with this advertisement?
The ad says that putting Rs 5,000 per month for 20 years will earn lifelong retirement of Rs 11,659 per month. The fine print of the ad mentions that they have assumed 8% p.a. returns for 20 years of accumulation phase. Why is this misleading? The problem, as Moneylife pointed out, is the screwed up math of advertisement as the value of Rs 11,659 per month after 20 years at 9% inflation is just Rs 2,081- which cannot allow the couple to enjoy their lifestyle of today. What is the worse, as Moneylife pointed out a saver would get a significantly higher return by investing in Public Provident Fund which is not taxable, unlike a pension plan. If one puts only Rs 5,000 pm in PPF for 20 years and gets 8% pa (to make a like-to-like comparison with company’s assumed rate of return), he will get life-long pension of Rs 16,761 pm While PPF does not offer lifelong pension, we assumed PPF corpus after 20 years to be invested in an immediate annuity product with 7% pa returns, which is in sync with company’s assumption in the ad. It’s a whopping 44% higher income than that what company’s slick advertisement offers! It has been possible because in PPF what you are offered as interest rate is what you get; the same is not true for life insurance and pension products due to the inherently hefty charges. If PPF continues to give 8.8% pa (current rate) then you would get a whopping 58% higher pension amount than what the insurance company ad offers!
Jago Investor, a personal finance website has highlighted how State Bank of India has misled the advertisement of its 5-year tax-saving deposit (deduction of up to Rs 1 lakh from taxable income under section 80C) would get effective yield of up to 17.39%. Because to arrive at Effective Annual Yield, an investor must fall in the category of 30% bracket and does not exhaust the limit of Rs 1 lakh from the taxable income under section 80C. When such being the case, how the advertisement can conveniently ignore the taxation on the interest income? Interest on bank deposits is taxable as “Income from other sources” as the investor falls in the same category of 30% marginal tax rate and it omits to mention the post-tax return which is substantially lower. It is a convenient forgetfulness on the part of advertiser.
What about Financial Regulations?
Unfortunately, the banking regulator has no rule on misleading advertisements, SBI and other banks too can get away with such mischief. But who cares as long as it is a big govt. owned entity? The only regulator to fix the problem of mis-selling of mutual funds and insurance are the Securities & Exchange Board of India (SEBI) and Insurance Regulatory Development Authority (IRDA). Their definition says, mis-selling is not restricted to false statements, but can also happen by ‘concealing or omitting material facts’ or ‘concealing associated risks’ and not taking care to ensure ‘suitability of the scheme to the buyer’.
Investors have the option of complaining to the Advertising Standard Council of India (ASCI), but that won’t work either. ASCI’s advertising code, which is the strict yardstick by which the complaints committee judges advertisements, does not provide for the peculiar nature of financial advertisements, which cause great financial damage by simply omitting key details. By ASCI’s current code, as long as the advertisement has disclaimers and seemingly correct calculations, there is nothing it can do.
What then is answer to the damage caused by misleading advertisement?
Clearly, we the investors and planners will need to get together to force all regulators to form a body like ASCI to formulate a common code that is applicable across the financial sector. However, the government has already set up a National Consumer Protection Agency (NCPA) to monitor and penalise companies that make misleading claims in their advertisements. The NCPA, under the consumer affairs ministry, would be empowered to take severe action, including recall of the product and slapping cases against the firms. The move to set up the NCPA was triggered by the increasing number of consumer complaints against misleading and exaggerated claims in advertisements.
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