Why you should not over-complicate your portfolio asset allocation By Uma Shashikant

Why you should not over-complicate your portfolio asset allocation

By Uma Shashikant

It is not easy to convince an investor that asset allocation is the best way to build long-term wealth. A dear friend seriously wanted to know. It is really tough to tell her that she should not seek out products, but take a more holistic view. It is much easier for many like her to simply sign on to investment products and be done with it.

There is simply no time to worry about these things, and as long as the product seems good, it should be fine. Whenever she calls, it is about investing some spare money. Sometimes, she provides me with a list of names given by her advisor, and asks me to vet them for her. She is actually not interested in any conversation beyond this. Why should it matter?

There are no investors, at least none that I know of, who have all their money in a single product. Even those that buy property have some balance in the bank, their Provident Fund (PF), tax-saving funds and insurance policies, and some gold in the locker.

Yes, that is asset allocation for you. Except that it is not to any specific design, but mostly build by default. How much you hold where, will affect your financial lives the most—in terms of risk, return and all else that you car .. 

The assets that we hold should ideally match our needs, and we should know what we intend to do with them. This is the gist of the financial planning framework. Since all money is not earned and consumed today, and since tomorrow might hold needs that require funding, and since some of these needs would be much larger than our small monthly incomes, we all need financial planning. This activity can get as elaborate as you wish, or as simple as the allocation between assets that earn an income and assets that grow in value over time. Why is this distinction important?

Assets that provide an income stream are meant to serve immediate and short-term needs. They will typically feature a low and steady return, mostly matching inflation rates, and preserve the invested capital. 

Read more at:
http://economictimes.indiatimes.com/articleshow/44306021.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

Gross & Net Returns

lease find below an interesting article with regard Gross and Net returns when a star fund manager exists from a fund house as appeared in The Economist for your reading and understanding:

Gross & Net Returns

The lessons from a star money manager’s exit

THE departure of Bill Gross, the world’s best known bond manager, from PIMCO, the investment firm he helped to found, has many potential lessons. At its simplest, it can be portrayed as a Shakespearean drama; the ageing king who refused to loosen his grip on power. Eventually, his subordinates rebelled and overthrew him.

PIMCO’s other titan, Mohamed el-Erian, departed earlier this year, prompting a reorganisation of the management team. The next generation of leaders wanted to expand in new areas, something Mr Gross apparently resisted. The Securities and Exchange Commission, an American regulator, recently announced an investigation into pricing at the Total Return fund, the main outlet for Mr Gross’s talents, creating the potential for damage to his reputation. Mr Gross ostensibly moved to Janus, a smaller fund manager, to focus more on investment and less on management, but he clearly jumped before he was pushed. The lesson could be that founders are rarely good at succession planning; they often stay in place too long.

A second lesson concerns whether investment firms are wise to rely on the reputation of a “star” fund manager. At its peak, the Total Return fund had assets of $290 billion, a good chunk of PIMCO’s $2 trillion total. Mr Gross’s occasionally eccentric pronouncements (he once devoted a section of his newsletter to the death of his pet cat) were avidly watched by other investors.

In recent years, he has made some big calls on the bond market. Four years ago, he talked of the British bond market resting on a bed of nitroglycerine; three years ago, he worried that yields would rise when the Federal Reserve ended its second round of quantitative easing. Neither bearish bet on bonds paid off and the Total Return fund suffered a slump in performance; its return is below the average for similar bond funds over the past five years.

In the short term, PIMCO may be damaged as clients follow Mr Gross to Janus. But the Total Return fund was already suffering outflows because of its faltering performance. In the long run, PIMCO may benefit if clients are drawn more by the strength of its team, and less by the abilities of an individual. Analysing the global bond markets, with their many different countries, currencies, maturities and credit ratings is not a one-man job.

The third lesson is for investors: beware big funds if they are actively managed. If a large bond fund is to beat the market (and justify its fees), the manager probably has to make some big bets on the economy. This is not the same thing as finding a few neglected companies, whose bonds are undervalued because investors have overlooked a crucial fact. Fund managers have no advantage in predicting the economic outlook; indeed, most economists failed to foresee the recession in 2008.

The “big fund” problem previously emerged at Fidelity, where its Magellan equity fund rose to prominence under manager Peter Lynch. After he left in 1990, the fund underperformed the S&P 500 in 12 of the next 20 years, although it did not reach its peak size of $110 billion until 2000. It has since shrunk to $17 billion.

This is a perennial issue. When fund managers perform well, they attract clients and the fund gets bigger. Eventually, however, the fund will stumble. There are three possible reasons for a reversion to the mean. First, the initial strong performance was down to luck, not skill. Second, the initial performance was due to a trend, such as rising technology stocks or falling interest rates (which boost bond prices); eventually, the trend changes. Third, the manager will struggle to excel as the fund grows bigger, perhaps because it has to invest in the shares of bigger companies, or because it must buy more liquid assets; eventually the fund starts to resemble the index.

When performance falters, money will exit again. Thus, in what might be called the Sod’s law of fund management, a fund’s worst year will probably occur when it is at its biggest. The last clients to jump on the bandwagon will be those who earn the weakest returns.

The same rules do not apply to passive funds, which explicitly try to match the index. In those cases, a bigger fund should lead to economies of scale which can be passed on to clients in lower fees. But the expense ratio of 0.46% on the Total Return fund translates into costs of $1 billion a year at its current size. According to Morningstar, an agency that rates funds, this charge “is a lot more than one might expect given [its] size”. Investors are betting big on PIMCO’s ability to beat the market.

regards

8 Financial Rules That Apply To Everyone and Their Money

8 Financial Rules That Apply To Everyone and Their Money

Even the wealthy and famous have to abide by these money rules. No matter who you are, how much you earn, or how you invest, a few truths apply to you and your money.

1. Spending money to show people how much money you have is the surest way to have less money.

Singer Rihanna earns tens of millions of dollars, but found herself "effectively bankrupt" in 2009. She sued her financial adviser for not doing his job. He offered a legendary response: "Was it really necessary to tell her that if you spend money on things you will end up with the things and not the money?"

The first iron rule of money is that wealth is the stuff you don't see. It's the cars not purchased, the clothes not bought, the jewelry forgone. Money buys things, but wealth -- assets such as cash, stocks, bonds, in the bank, unspent -- buys freedom and security. Pick which one you want wisely.

2. Wealth is completely relative.

According to World Bank economist Branko Milanovic, "the poorest [5%] of Americans are better off than more than two-thirds of the world population." Furthermore, "only about 3% of the Indian populations have incomes higher than the bottom (the very poorest) U.S. percentile." And those figures are adjusted for differences in cost of living.

The easiest way to judge how well you're doing is to compare yourself to people around you. The curse of living in the United States is that most people are doing well, so your own success looks ordinary. If you want to feel rich, look at the 90% of the world that isn't American or European. You'll realize that feeling rich is just a mental game.

3. The goal of investing isn't to minimize boredom, it's to maximize returns.

Successful investing is pretty boring. Its main requirement is patience and inaction. Most people demand more excitement, so they tweak, fiddle, and adjust their investments as much as necessary to destroy as much of their wealth as possible. If you want to do better than average at anything, you must do something that most people can't. In investing, that means putting up with perpetual boredom. It's a serious skill.

4. The only way to build wealth is to have a gap between your ego and your income.

Getting rich has little to do with your income and everything to do with your savings rate. And your savings rate is just the difference between your ego and your income. Keep the former in check and you should be fine over time.

5. The most valuable asset you can have is a strong propensity to not care what others think.

Most people are bad with money, so being good means doing things differently than they do. You won't spend as much. You'll invest differently. You'll grow wealth slower. This can make you look like a fool in the short run. But who cares what others think? They're probably idiots. As Charlie Munger put it, "Someone will always be getting richer faster than you. This is not a tragedy." Not only is it not a tragedy, but it's a necessity. The ability to not care what other people think about what you're doing is mandatory in achieving abnormal results.

6. Spend more time studying failures than successes.

You can learn more about money from the person who went bankrupt with a subprime mortgage than you can from Warren Buffett. That's because it's easier and more common to be stupid than it is to be brilliant, so you should spend more effort trying to avoid bad decisions than making good ones. Economist Eric Falkenstein summed this up well: "In expert tennis, 80% of the points are won, while in amateur tennis, 80% are lost. The same is true for wrestling, chess, and investing: Beginners should focus on avoiding mistakes, experts on making great moves."

7. People are flawed, so a lot of stuff makes no sense.

As James Grant put it, "To suppose that the value of a stock is determined purely by a corporation's earnings is to forget that people have burned witches, gone to war on a whim, risen to the defense of Joseph Stalin, and believed Orson Welles when he told them over the radio that the Martians had landed."

8. Anything can happen at any time for any reason.

You might be laid off next week. You can be sued tomorrow. Or win the lottery. Maybe you'll get cancer, or a huge promotion. Stocks can rally for twice as long as you think and crash twice as fast as you assumed. History is one damned thing after another, most of it involves money, and there's nothing you can do about it.

regards

Everything you wanted to know about Income Tax Notice ? Pos

Everything you wanted to know about Income Tax Notice ? Posted: 08 Nov 2014 04:27 AM PST If you are a taxpayer then you must have heard the recent news about IT department’s drive by keeping a close eye on all your transactions. Even the salaried employees are on the radar. Department has already identified 12 lakh taxpayers who have not filed their returns, more than 20 Crores high value transactions are being scrutinized and Notices/letters to more than 1.5 lakh people have already been issued. 8 reasons why you can expect IT department to issue a Notice to you? Let’s take the first parameter today and see how & under what circumstances a notice can be issued to you as follows:- Reason #1 – You have not filed your return Every individual earning more than Rs. 5,00,000/- p.a. needs to file tax returns compulsorily, even if the tax is already deducted (TDS) and paid . So if you have not filed your returns from many years, then you can surely expect a notice from IT department very soon. You might have not filed it due to your laziness or simply because you didn’t get the time, but understand that this mistake can cost you a lot especially when you have some any kind of tax evasion ! Reason #2 – Interest from FDs or Savings A/C This is one big reason which can apply in most of the investors case . Generally banks deduct 10% TDS on the deposits interest by default, but you are suppose to pay any additional tax if applicable depending on your income tax bracket. There is a big myth that one does not need to pay any tax if TDS is cut by the bank. For example if you are 30% tax bracket and you have Rs 5 lacs FD in bank and imagine 8% is the interest rate, which means you get a Rs 40,000 interest from the FD , now the bank will deduct the 10% TDS (which is Rs 4,000) and pay to the govt , and give Rs 36,000 directly to you . Now actually tax you had to pay was 30% to govt, which means that at the end of the year you need to pay additional Rs 8,000 in tax. If you have not done this , then you might be inviting trouble for future. Reason #3 -Sudden drop in Income Do you know that if there is a significant reduction in your income from last year, then it may cause suspicion and you might invite a IT scrutiny. This is more applicable in case of businesses and traders, because their income is highly volatile . However in case of salaried people, this is not a big issue because in general there is no huge drop from the last year income. Let me give you an example – Imagine Ajay, who runs a business and earned Rs 15 lacs in a year and paid his taxes properly in year 2014 . Now in 2015, he files his income tax returns with Rs 12 lacs income or Rs 17-18 lacs income, this looks natural overall , but imagine he files his return declaring his income to be Rs 3.5 lacs, then suddenly it raises some eyebrows and the IT department might want to talk to you . It might happen that you are not doing any tax-Chori, but IT department might want to enquire . Reason #4 – Claiming Higher refund amount If you have filed your returns claiming a high refund in a particular year, there are chances that you might get a scrutiny . This is because firstly, its a higher amount to be refunded back to you , so naturally tax department might want to have a look at data and might question things (otherwise everyone will start asking for refunds without solid reasons) , and secondly – the refunds are generally a lower amounts because of the mismatch in your planning or some calculation and any big tickets will attract eye balls . So if you have paid Rs 2 lacs tax, and you are asking for Rs 15,000 Refund or Rs 35,000 refund . It looks fine .. but if you ask back 90,00 refund, that might attract scrutiny. Reason #5 – Mismatch in TDS credit You need to check & reconcile your form 26AS with all the taxes as paid on your account . It should ideally not happen that the TDS amount you are claiming in your income tax return and the TDS actually updated in your form 26AS are different . Thats why before filing your returns, its an important thing to check your 26AS , make sure its updated properly (check with your employer who has paid TDS, check with banks who paid TDS on your interests) . Only once everything looks fine, then claim the TDS amount . Dont assume things like (my employer must have paid TDS and updated it properly) . Reason #6 – Non Declaration of Exempted Income  There are various income’s on which you dont have to pay income tax , but they must be still mentioned in the income tax return . Things like your long term capital gains tax from equity , or lets say gifts you recieve from your parents/relatives .. These are some of the things which are exempted from tax, but that does not mean you dont have to tell the income tax department about it and you should anyways not hide it because there is no reason for it. I know a lot of people might be feeling – “Ohh .. I thought declaring it might have attracted a IT scrutiny” or “Ohh .. I never knew this .. I have never done this for all these years, what do I do now ?” .. So now as you know make sure you take your income tax filing very seriously, because till the time you dont get IT scrutiny its not an issue , but the day you will get it, you will know its a pain Reason #7 – Taking double benefits due to change in Job Many times salaried employee who changed job during previous year gets multiple form 16 & fails to declare income from all the employers & calculate and pay the due taxes, if any. It may arise on account of certain deductions & benefits given twice . So imagine you left a job in June 2014, and joined a new company and now you are going to file your taxes in year 2015 . Around this time, you will realise that your past employer has deducted your TDS for 3 months , has given you HRA benefits and you also claimed some medical bills there , but its such a pain now dig deeper and arrange for all information, so what do you do ? You just skip all that, and consider the income from the new employer after June and file your returns. This can really back fire .. Reason #8 – High Value Transactions If you have executed high value transactions either for investments or spending then chances of you getting the notice from IT Department are very high. For e.g. your credit card usage of more than Rs. 2 lakhs p.a./ investing in FDs for more than Rs. 5 lakhs/ depositing more than Rs. 10 lakhs in your bank account/ investing more than Rs. 2 lakh in MFs or Rs. 1 lakh in Shares or buying or selling property over Rs. 30 lakhs. All these transactions are reported to the IT department under Annual information Returns filed by respective companies. How to Avoid getting Notice from IT department With the IT department becoming net savvy and going online, it has become very easy for them to identify discrepancies in your papers and to keep a close eye on almost every financial transaction you do. Even the honest taxpayers have received notices and have come under the scrutiny causing them running around to prove their honesty. Hence it becomes very critical for everyone to maintain their papers & documentary evidences properly to safeguard their own interest. You need to take the following actions to minimize your chances of receiving a notice – Always file your returns on time and correctly - This is the basic precaution you need to take to ensure 100% compliance with the law. Make sure you are filing the return correctly and all the details given by you while filling Returns matches with the details available with department. Submit ITR V to Centralized Processing Centre (CPC) Bangalore: Your filing of taxes would get complete only when your ITR V reaches CPC. Just uploading returns online is not enough; make sure you get confirmation of its receipt from CPC. Please follow the Dos & Don’ts of sending ITR-V to CPC. Check your form 26AS (Tax Credit Statement): “26AS” gives the details of the “TDS” deposited on your behalf. You should check all the TDS payments duly credited to you or get it rectified otherwise. It can be viewed though NSDL or IT department’s site and even through Bank’s online portal. Mismatch in Income & Expenses/investments:  If your income was Rs. 10 lakhs and you invested Rs. 25 lakhs, you need to justify the source of used funds and the same applies to expenses also. Gifts/Money credited to your account: If you have funds credited to your account out of Gifts or loan from relatives/ friends, you need to keep the documentary evidence for the same. You may also need to report these transactions in few instances. Declaring “Exempt” Income: Even though few Incomes are exempt from the tax, you still need to declare this while filing your return. Updating PAN details: Keep updating any changes in your pan data like address/surname change post marriage etc. Pay Advanced Tax: if you are liable to pay advance tax, then you have to pay it as per its schedule & deadline. Form 15H or 15G: Use 15H/15G instead of claiming refund, submit this at all the financial institutions like banks to prevent them from deducting TDS on your investments with them; in case your Income is below the taxable limit. Avoid High Value transactions: Department gets information for all your high value transactions from the concerned institution and chances of you coming under scrutiny increases. Avoid these transactions wherever possible & plan it carefully and legally. How to deal with Income Tax Notice? Any communication from IT department & especially receiving a Notice can send shivers down your spine, even though it might be a routine enquiry or a simple clarification sought. Notice can be issued for varied reasons and there is no standard single solution to deal with different notices in the same way, but you can surely follow these 12 golden steps as mentioned below in response to any kind of notice you may receive:- Step 1 Neither Panic nor Ignore – Your first reaction could be to press the panic button or ignoring it completely due to ignorance, both ways are wrong and key is to handle this carefully and sincerely else you may end up paying the penalty of up to Rs.10,000/- along with tax payment. Step 2 Check if its issued in your PAN – Department issue notices based on your PAN and not by name, so make sure notice is issued in your PAN and do not pertains to someone else who shares similar names or DOB as yours! Step 3 Identify the reason behind issuing a notice – Reasons could be a simple mismatch in TDS or inconsistency in your returns or some serious concerns like income concealment or survey or scrutiny of accounts. Step 4 Check Validity and Issuer Details - Check the validity of a notice & timely issuance and under which IT section it has been issued and also look at the mention of officer in-charge, his or her designation, signature, address with details of ward & circle no. etc. Verify these details in view to avoid being cheated. Step 5 Check DIN – If the notice is delivered online then check document identification number. Step 6 Preparation two sets of documents and covering letter - – Start collecting documents which you are asked to furnish before the assessing officer or based on the gravity of the notice. and make sure you prepare a covering letter along with the set of documents. Prepare two set of all the documents required to be submitted to the department along with a covering letter, get a stamp on your copy for your record purpose and as a proof of submission of documents and complying with the notice. 3 Important Points you should always remember Reply in time - Always reply in time even if you are not able to collect the required documents. You can even ask for some time to prepare the same. It would establish that you are honest and cooperating with the laws. Preserve the Envelope: If you receive the notice in an envelope please keep the same safely as it contains Speed Post number which work as an evidence of its delivery to you. Professional Help: If the gravity of notice is high then it would be prudent to have a CA represent you (you can hire us for your issues or any other income tax related problem). Otherwise you can follow the above steps and represent yourself in most of the cases. One of the major steps that you need to take even otherwise is to keep track & records of all your Tax papers & financial transactions for the last 6 years as it will help you substantiate your claims in case of any scrutiny. I hope this guide has given you enough knowledge about the income tax notice and why scrutiny cases happen . If you just take care of few things, you can surely lower the chances of getting income tax notices. Let us know what all did you like and if you have any questions in the area of income tax ? This article has been contributed by Rishabh Parakh from Money Plant Consulting who are pioneers in the are of Income Tax and CA related services . They do income tax filing and handle tax scrutiny cases. Jagoinvestor has exclusive tie up with Rishabh Firm. You can Click on this link to Contact Rishabh for any professional Help

Dear All,

Please find below a good article as appeared in Morning Star for your reading:

How much should you rely on beta?

After the market volatility of the past few years, I have become more attuned to risk of my investments. I would like to know how to use a statistic like beta.

Individual mutual fund reports on our website feature a Risk/Rating tab, which lists a number of quantitative risk/return measures. These measures include Morningstar's risk-adjusted ratings, measures of volatility, and various modern portfolio theory, or MPT, statistics over different time periods – beta being one of them.

Each of these measures provides a different look at a fund's risk, volatility, return, or a combination of those factors.

MPT is rooted in the assertion that there's no free lunch -- you'll only obtain higher returns if you're willing to take on more risk. At the same time, MPT holds that diversifying a portfolio across multiple assets can help decrease its risk level.

Modern portfolio statistics such beta attempts to show how an investment's volatility and return characteristics compare with those of a given index.

How it works

Beta is a measure of a fund's sensitivity to market movements.

The beta of the market is 1.00 by definition. Morningstar calculates beta by comparing a fund's excess return over Treasury bills to the market's excess return over Treasury bills, so a beta of 1.10 shows that the fund has performed 10% better than its benchmark index in up markets and 10% worse in down markets, assuming all other factors remain constant.

Conversely, a beta of 0.85 indicates that the fund's excess return is expected to perform 15% worse than the market's excess return during up markets and 15% better during down markets. A fund with a beta of 1.23 indicates that it is expected to gain, on average, 23% more than the market in up markets, and expected to lose, on average, 23% more in down markets.

How to use it (and how not to)

Understanding beta will serve as a helpful foundation in deciphering and using the other MPT statistics.

Beta attempts to gauge an investment's sensitivity to market movements. When the market is up on a given day, will the fund gain even more than the benchmark? And when the market is down, will the fund lose even more than its benchmark? A lower beta not only indicates that an investment has been less volatile than the market itself, but also implies that the fund takes on less risk with lower potential return. Contrarily, a higher beta implies a higher-risk investment with greater return potential.

In theory, beta is a relatively straightforward, quantifiable measure of relative risk. Investors can use it, along with other risk and volatility data points, to help compare multiple investments and determine how, if at all, a specific investment might fit in the context of a broadly diversified portfolio.

At the same time, is not a foolproof measure for practical application.

First, investors should keep in mind that because beta is a relative figure, it is not appropriate to assume that a low beta implies low volatility or that a high beta implies high volatility. For example, a fund may have a fairly low beta, but if the benchmark used to calculate that beta is ultra-volatile and features aggressive holdings, the fund won't necessarily exhibit low volatility in an absolute sense.

Secondly, though beta is based on an investment's past behaviour, it is used to determine how a fund is likely to behave in the future. However, historical performance can be unreliable in predicting future performance or future relative volatility.

And because beta is derived from a formula that only takes into account fund and benchmark returns and correlation, the statistic paints an overly simplistic and incomplete picture. For example, beta does not take into consideration macroeconomic developments.

Moreover, beta assumes that going forward, a fund's potential for upside and downside risk is virtually equal, but in practice, investments rarely exhibit perfectly symmetrical risk/return profiles.

The beta statistic also removes from the equation the additional risk that investors' behaviour can impose on their holdings.

Finally, and most important, the usefulness of a fund's beta (and other MPT statistics, for that matter) is completely dependent on the relevance of its market benchmark. A fund might have a very low beta, but if it's not closely correlated with the index used to calculate that beta, the statistic is close to meaningless.

That's why investors using MPT statistics should do so in conjunction with the fund's R-squared, which measures its correlation with a given benchmark.

http://www.morningstar.in/posts/28708/how-much-should-you-rely-on-beta-2.aspx?utm_campaign=shortanswer&utm_medium=email&utm_source=morningstar

Dear All,

Please find below a good article as appeared in Morning Star for your reading:

Avoid these four investment mistakes

Whether it's the Dutch tulip craze of the 17th century, the dot-com mania of the late 1990s or the rush into real estate south of the border in the early to mid-2000s, there is no shortage of examples of investors behaving irrationally.

However, in the world of traditional economists and finance professors, that's not supposed to happen because if investors are rational decision-makers, then emotion-driven bubbles should not be possible. Yet human weaknesses can limit our ability to think clearly. Many studies of investor behaviour have shown that investors are too willing to extrapolate recent trends far into the future, too confident in their abilities, and too quick (or not quick enough) to react to new information. These tendencies often lead investors to make decisions that run counter to their own best interests.

The idea that investor psychology can result in poor investment decisions is a key insight of an increasingly influential field of study called behavioural finance. Behavioural-finance theorists blend finance and psychology to identify deep-seated human traits that get in the way of investment success. Behavioural finance isn't just an interesting academic diversion, however. Its findings can help you identify -- and correct -- behaviours that cost you money.

What commonplace mistakes should investors avoid? Here are a few key behavioural-finance lessons worth heeding.

1) Don't read too much into the recent past

When faced with lots of information, most people come up with easy rules of thumb to help them cope. While useful in some situations, these shortcuts can lead to biases that cause investors to make bad decisions. One example is "extrapolation bias," the overreliance on the past to assess the future. Instead of doing all the necessary and possibly tedious homework in researching a potential investment, investors instead "anchor" their expectations for the future in the recent past.

The problem, of course, is that yesterday doesn't always tell you what tomorrow will bring. If you don't believe us, just ask investors who swarmed red-hot technology- and internet-focused stocks in 1999 and 2000 expecting the good times to continue. And when they didn't, some people suffered huge losses.

That's worth keeping in mind if you're drawn to the strong performers of recent times, be it precious metals or infrastructure or any other theme. The past is no guarantee of future performance.

As Wall Street Journal columnist Jason Zweig has said, "Whatever feels the best to buy today is likely to be the thing you'll regret owning tomorrow." Investors tend to pour money into funds after they've performed well and rush for the exits after the funds have underperformed, resulting in much lower returns (or even losses) for average investors compared with funds' reported returns.

2) Realise that you don't know as much as you think

In a 1981 study asking Swedish drivers to assess their own driving abilities, 90% rated themselves as above average. Statistically speaking, that's just not possible. But most of us are just like the Swedes: We think we're more capable and smarter than we really are. As an investor, you should check your excessive optimism at the door. You might believe you're more likely than the next guy to spot the next multibagger, but the odds are you're not.

According to several studies, overconfident investors trade more rapidly because they think they know more than the person on the other side of the trade. And all that trading can be "hazardous to your wealth," as University of California, Berkeley professors Brad Barber and Terrance Odean put it in their 2000 study of investor trading behaviour. The study looked at approximately 66,000 households using a discount broker between 1991 and 1996 and found that individuals who trade frequently (with monthly turnover above 8.8%) earned a net annualised return of 11.4% over that time, while inactive accounts netted 18.5%. Investors who traded most often paid the most in brokerage commissions, taking a huge bite out of returns.

All that trading might have been worthwhile if investors replaced the stocks they sold with something better. But interestingly, the study found that, excluding trading costs, newly acquired stocks actually slightly underperformed the stocks that were sold. That means that rapid traders' returns suffered whether or not fees were taken into account. Some researchers have come to a similar conclusion studying fund manager trading -- standing pat is often the best strategy.

If you constantly check your portfolio, you may be tempted to take action at the slightest hiccups in your holdings or in the market. Limit the number of times you even look at your portfolio; a check-up once or twice a year will be plenty for most investors. That will help you stay disciplined and will save you money on transaction fees.

3) Keep your winners longer and dump your losers sooner

Investors in Odean and Barber's study were much more likely to sell winners than losers. That's exactly what behavioural-finance theorists would predict. They've noticed that investors would rather accept smaller but certain gains than take their chances to make more money. On the flip side, investors are reluctant to admit defeat and sell stocks that are underwater in hopes of a rebound. As a result, investors tend to sell their winners too early and hang on to their losers for too long.

That's why it pays to have clear reasons in mind for your purchase of any investment right from the get-go. If your expectations don't pan out, then it's time to sell. Crafting an investment policy statement that lays out basic parameters for your portfolio and what you're looking for in individual securities is a key way to instill discipline in your financial decision-making process.

Periodically rebalancing -- but not too often -- is another way that investors can avoid mental mistakes when buying and selling. Rebalancing involves regularly trimming winners in favour of laggards. That's a prudent investing strategy because it keeps a portfolio diversified and reduces risk; it ensures that you periodically harvest your profitable holdings. But rebalancing too frequently could limit your upside. Instead, rebalance only when your portfolio is out of whack with your target allocations. Minor divergences from your targets aren't a big deal, but when your current allocations grow to more than five or 10 percentage points beyond your original plan, it's time to cut back.

4) Avoid compartmentalisation

One other key mental mistake is focusing on individual securities in isolation rather than looking at your portfolio as a whole. If you're adequately diversified overall, your portfolio won't exhibit big swings on a day-to-day basis. But individual holdings can and will gyrate around quite a bit, and that could lead you to focus a disproportionate amount of time and energy on certain positions at the expense of the big picture.

To help stay focused on how you're really doing rather than paying undue attention to one or two holdings, it can be useful to view your portfolio in aggregate by using a tool like Morningstar's Portfolio Manager. If you already have multiple portfolios on the site, you can also collapse them into one large portfolio. Simply click "Combine" from the "Create" menu.

It's all about discipline

Fortunately; you don't have to be a genius to be a successful investor. As Berkshire Hathaway chief and investor extraordinaire Warren Buffett said in a 1999 interview with Business Week, "Success in investing doesn't correlate with IQ once you're above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing." It's true that not everyone is gifted with Buffett's calm, cool demeanour. But challenging yourself to avoid your own worst instincts will help you reach your financial goals

regards

Dear All,

Please find below a good article as appeared in Morning Star for your reading:

5 Investment Lessons from Charlie Munger

Warren Buffett's right-hand man and investment partner has a lot of wisdom for investors to ponder upon.

It's virtually impossible to overstate the influence that Charlie Munger, who recently turned 90 years old, has had on Warren Buffett's investing discipline. Buffett regularly labels Munger as his "partner" at Berkshire Hathaway and fills the firm's annual shareholder letters with phrases like, "Charlie and I believe ..." In fact, in Berkshire's 2012 letter, Buffett makes reference to their long and fruitful working relationship, writing, "more than 50 years ago, Charlie told me that it was far better to buy a wonderful business at a fair price than to buy a fair business at a wonderful price."

That insight has guided Buffett over the years and helped him become more comfortable with paying up for outstanding businesses with economic moats, or sustainable competitive advantages.

Given Munger's age, no one can say how much longer investors can expect to see him sitting at Buffett's side each May, delighting audiences with his wisdom and also chiming in with his favorite line, "I have nothing to add," immediately after Buffett expounds on a topic.

Some of the core investment principles that Munger has espoused can be found in the excellent 2005 book Poor Charlie's Almanack, a collection of Munger's best talks, quotations, and thoughts. Modeled after Poor Richard's Almanac by Munger's hero, Ben Franklin, Poor Charlie's Almanack lays out Munger's worldview, including his "multidisciplinary" approach to clear, elegant thinking.

1) Multiple mental models

One of Munger's principal frameworks is to more broadly understand, collect, and organise the factors affecting an investment candidate. This means drawing what he calls "multiple mental models" from a variety of disciplines, including engineering, mathematics, physics, chemistry, and psychology. Driving this need to understand the various dynamics surrounding an investment--both in its internal and external environment--is Munger's understanding that these various factors can work in concert. Munger termed that dynamic a "Lollapalooza Effect"--when anywhere from two to four forces all are driving the investment in the same direction. And yet, Munger noted in Outstanding Investor Digest in 1997 that the effect isn't "simple addition" but rather more akin to a "nuclear explosion."

One doesn't need to be an academic to tap these different models, including the modern Darwinian synthesis model from biology or cognitive misjudgment models from psychology. Indeed, Munger himself acknowledges that his understanding of these models is entirely self-taught.

2) Guiding principles

Munger's invocation of multiple mental models has given him a mindset characterized by four guiding principles that any ordinary investor should follow: preparation, patience, discipline, and objectivity. When practiced correctly, these attributes should result in buying great businesses at good prices and keeping one's portfolio turnover low.

Poor Charlie's Almanack describes his worldview, perhaps tongue-in-cheek, as "Quickly Eliminate the Big Universe of What Not to Do, Follow Up with a Fluent, Multidisciplinary Attack on What Remains, Then Act Decisively When, and Only When, the Right Circumstances Appear."

Munger and Buffett have proved that it works. Munger once said, "It's kind of fun to sit there and outthink people who are way smarter than you are because you've trained yourself to be more objective and more multidisciplinary. Furthermore, there is a lot of money in it, as I can testify from my own personal experience."

3) Yes, no, and inbetween

In addition to favoring a narrow, concentrated portfolio, Munger holds the view that he should stick to his knitting when evaluating investment candidates. "Yes" candidates are easy-to-understand businesses with distinct and sustainable competitive advantages with a dominant franchise. He immediately dismisses other possibilities, especially in health care and technology, into what he calls the "too tough to understand" pile. Others-- deals pushed by brokers, including IPOs-- fall into the "no" pile.

4) An all-round perspective

Munger considers every aspect of a business when considering a candidate for investment, evaluating management's character and capital allocation decision-making. He also analyzes a business' competitive advantages, mindful that few businesses endure for multiple generations. Thus, understanding a business' sustainable competitive advantages is critical. Munger pays close attention to the company's operating and regulatory environment, the impact on it from changes in technology, hidden exposures, and the current and future impacts of stock options, pension plans, and retiree medical benefits.

5) Compute value

Finally, Munger carefully attempts to compute the business' underlying value. To avoid anchoring, he tries to calculate a business' value independently of the price at which a company trades.

Robert Goldsborough, fund analyst on the passive funds research team, wrote this piece for Morningstar.com. The above is an extract from the original.

http://www.morningstar.in/posts/25045/5-investment-lessons-from-charlie-munger.aspx?utm_campaign=just5&utm_medium=email&utm_source=morningstar

Dear All,

Please find below a good article as appeared in Advisor Khoj for your reading:

How will personal Financial Planning help you?

Many investors think that a big deal is made out of personal financial planning. They say that, if you save regularly and invest wisely, then you will be able to meet most of your goals. However, investors without a well structured financial plan may end falling short of their financial goals. At different stages of life, different goals seem relatively more important to us. For example, if you are in your early thirties and do not own a house, buying a house may seem to be a very important goal. Retirement, which is twenty five or thirty years away may not seem to be a very important goal. On the other hand, if you are in your twenties and recently married without children, children’s college higher education is so far away, that you may not really be concerned about it. However, over your entire saving and investing lifecycle, are any of these goals less important? No, all the goals are very important. Your financial plan will help you to be ready for each of the financial steps in your life. In this article we will discuss, how personal financial planning will help you.

• The first step of financial planning is to define specific goals. The more specific the goals are the better. Sometimes, especially if you are young, you may not have enough clarity about all the financial goals in your life. This is where an expert financial planner or adviser can help you. He or she can help you define the goals across your savings and investment lifecycle. He or she can then, help you determine the specific numbers you need to reach specific goals. For example, if you want to buy a house in a particular neighborhood five years later, your financial planner can help you determine how much corpus you will need, based on several factors like current property prices in that neighborhood, real estate appreciation trends, inflation, down payment requirements etc. He or she can help you to determine, how much you need to save and invest each month to meet your goals. You financial planner will also make recommendations on the type of investments you should use to reach those goals. For example, if you have a short to medium term goal, your financial planner will calibrate your asset allocation, towards that particular goal appropriately. On the other hand, if you have a long term goal, your financial planner will recommend a more aggressive asset allocation.


• Budgeting is the next step of financial planning. This is probably the most important step of financial planning, because even if you have the most detailed and well structured financial plan, if you are not able to save enough, you will not be able to meet your financial goals. Saving habits are very personal. It depends on our lifestyle, relative to our income levels. Some of us, irrespective of our income levels, are very careful about expenses. Others are more extravagant as far as spending is concerned. The objective of a good financial plan is to enable you to meet your short term or long term financial goals, without having to sacrifice the lifestyle commensurate with your income. This is where a thoughtful budgeting exercise is very useful. Your budget allows you to plan how to spend your money. It makes it easier to find ways to save money. While financial planner or adviser may not actually prepare your budget, he or she can give you guidance on how to find additional savings in your budget. In a budgeting exercise, the devil is in the details. Therefore, you should not skip even minor details when preparing your budget. Through a careful budgeting exercise, you may be able to identify expenses, which you can easily reduce, with any noticeable impact on your lifestyle. Sometimes, it is not just about reducing consumption, but also negotiating lower prices, for the goods and services you consume. Some costs may seem too small to bother about. But even small additional savings can make a big difference to your long term wealth, with the help of power of compounding. Just to give an example, even an additional Rs 500 monthly savings, invested in equity assets yielding 20% return, will generate a corpus in excess of Rs 1 crore over 30 years. On the other hand, even with the most rigorous budgeting exercise, you may not be able to save what you need to meet your financial goals. In that case, we will have to realistic about our goals. Your financial planner or adviser will help you re-calibrate your financial goals, either by postponing the goal timelines or re-adjusting the goals. Not all financial objectives can be postponed. For example, your children’s higher education or your retirement cannot be postponed. On the other, you can postpone your car purchase or house purchase. Your budget will play an essential part of making your overall financial plan work.
• Financial plans help you prepare for big events in your life. These events like, house purchase, your children’s higher education, your children’s marriage etc, have a big impact on our lives. Some people rely on making windfall gains, like getting a big bonus or an unusually big profit on their investment, to be ready for these events. You should prepare for these events, instead of leaving them to chance. Unless you have enough savings and investments, you will not have enough money, one fine day, to make the down payment for house purchase. You should start preparing for it early enough. Similarly, you cannot wait till your child is sixteen to start preparing for his or her higher education. You need to start much earlier. Financial planning helps you inculcate, disciplined savings and investment practise. Once you have developed a robust financial plan and have started executing on it in a disciplined fashion, your preparation for the big events in your life will be on auto pilot.


• Financial plans give you a head start in meeting your financial objectives, especially if you are young. For many young people, saving and investment is not an important priority. However, as with anything else in life, starting to invest from early age has great benefits. The earlier you start, the better are the chances for creating wealth as you get more return for more time on your investments. Please read our article, Why you should start investing early, to understand the benefits of having a financial plan and committing to it, when you are young. Financial planning and investing is often a daunting task for young people. You are not sure about your specific long term goals. This is where an experienced financial planner or adviser can help you. Working with a financial planner is most beneficial if you are young.


• Financial planning will help you make the right investment decisions. Asset allocation is one of the most important aspects of financial planning. How you invest your savings (debt or equity or real estate), makes a big difference, to your long term wealth. A lot of investors allocate a sub-optimal proportion of their portfolio to equities. This is because the risk appetite of investors in India is low. A financial planner or adviser will provide guidance to investors with regards to their asset allocation strategies, in order to meet their short term, medium term and long term financial objectives.


• Having a financial plan helps you prepare for contingencies. Contingencies are unforeseen events that can cause financial distress. The worst case contingency is an untimely death, which can result in financial distress for the family, apart from the emotional trauma. Financial planning can help us prepare for such contingencies through adequate life insurance (please refer to our article, How much life insurance is adequate). Another contingency is serious illness that can have an impact on your savings and consequently your short term or long term financial objectives. A good financial plan will make adequate provisions for health insurance. There can be other contingencies like temporary loss of income or major unforeseen expenditures. Financial plans will help you prepare for such contingencies.
Conclusion
In this article we have discussed, how personal financial planning can help you meet your short term, medium term and long term financial objectives. You should engage with an expert financial adviser, to help you prepare your financial plan and execute on it. In our next article, we will discuss some important steps in the financial planning process.
https://www.advisorkhoj.com/top-articles/Personal-Finance/How-will-personal-Financial-Planning-help-you?utm_medium=email&utm_source=MailDirect&utm_campaign=Advisor+18_11_2014_1#.VGtuizSUf-s
regards

Trading Capital And Income Calculation

Date: October 30, 2014 Author: admin

Trading Capital And Income Calculation                                                                              30-10-2014

One of the questions that I get asked often at training seminars is about how much capital is required for trading and how much money one could make as a day trader. While the right answer to this is No Limit, lets try finding a more practical answer.

Knowing that the market is a place of almost infinite wealth potential, how do I set a practical figure to what I should be earning? I suggest that the best way to find that out is to look at what your qualification can get you as a salary if you were to hold down a job. Or maybe if you are not qualified enough to get a good well-paying job, then look at what some others are earning in some small business that you feel you could do as well. Lets peg that amount to 50000 per month. This is a reasonable middling amount that most beginners would make. If your averages are higher you can always rework the math. Your trading income should be equal to this.

Let us assume that we shall trade 3 times a week. That is about 12 sessions in a month. So this gives us about 4000 to be made as profits per session. The daily volatility of any stock or index is about 1 to 1.5%. Assuming a stock priced around 300-400, this would mean an average daily movement of about 4-6 points. Most of such stocks would have a trading lot size of 1000 shares. So you would need to trade one lot to capture the kind of profits that we have set out to do so. That would require you to fund the account with a margin of about 50K (minimum) to 100K.

Now let us look at the risk part of it. Normally any trading method would suggest a stoploss on such a stock at around 1%. So that would be 3-4 points of risk, making the trade a 1:1 payoff in terms of a risk to reward. This is acceptable (and cannot be less).  Now if I decide not to risk more than half a percent of my capital on every trade, then my capital has to be around 1 lac (at 4000 risk per trade). Setting this kind of risk parameter will allow you to have a losing streak of 25 trades before your capital gets wiped out. While such runs are indeed possible, the probability is low.

What about the losses that shall inevitably occur? Well, that is a function of your trading method and its efficacy. It is presumed in the above calculation that you have finalised a trading method that has a positive expectancy. Higher that number the better the system. Idea here is that one should persist with the method (since it has a positive expectancy) and the method itself should produce sufficient number of trades to ensure the profit target. To illustrate, we need 12 winning trades to reach our profit goal. If the system is operating at 40% efficiency ratio, then the system will have to throw up at least 30 trades within a month. Assuming that losing streak runs shall be larger, the system will probably have to generate between 35-40 trades per month for the profit goal to be reached. This trade requirement can then be used to decide what time frame chart is to be used to produce the trades. The overall drawdown of the system as well as the number of negative runs shall also decide whether additional capital may be required.

Thus we can see that it is not just about fixing a figure to earn. It is a complete analysis of several aspects of risk, reward, trading methodology, expectancy, drawdown and runs. You can substitute different numbers for indices and margins etc. to arrive at similar numbers. This is a business. Approach it in a business-like manner.