18 November 2015

Stable Investor Completes 4 Years – My Letter to You

4 Years Stable Investor


Yesterday, Stable Investor completed 4 years. Coincidently, 17th November was also the first day of my first corporate job. Though first-day-first-job has its own charm, I must confess that I remember this day more because of Stable Investor and less because of first-day-first-job feeling. :-)

Now to say that I am happy and satisfied after completing 4 years would be both right and wrong. I am happy – Yes. I am satisfied – No. Why no? Because I want this to continue for many more years to come.

But that is not possible without YOU.

My heartfelt thanks to all of you who read, like, share and write back to me. Had it not been for you all, I would have been like a person on a deserted island, shouting out his thoughts with no one to listen to.

Every week, I get numerous mails from readers. Many are about how something I wrote helped them take a good financial decision. These mails mean a lot to me. And everytime a reader writes to me, it becomes another source of motivation for me to carry on.

Not a day goes when I am not thinking about what I should write here. Infact, it has become such an integral part of my life that at times, my wife questions whether I am married to her or Stable Investor. But even she realizes what this means to me. And result of her realization is that even my personal birthday cake did not have my name on it! :-)

Since the site is about numbers (more specifically money), here are some numbers that might interest you. Site now has 250+ articles on areas of Investing, Personal Finance and Common Sense. Few months back, site’s traffic crossed million hits. Email and RSS feed subscription have doubled and tripled respectively, in last one year. On social media, Stable Investor has more than 4200 Facebook fans (become one) and 2300+ Twitter followers (join them). These numbers are not huge but still prove one thing very clearly – there is a growing tribe of people who actually believe in benefits of real long term investing and who also want to put their personal finances in order.

Here are the 8 most read posts on the site that were published in last one year:

Now I am sharing few words by Morgan Housel (source) here. I shared these last year too. But relevance of these words here, force me to share these again:

Investing isn’t easy. It can get emotional. It can make you angry, nervous, scared, excited, and confused. Most of the time you make a decision under the fog of these emotions, you’ll do something regrettable. So talk to someone before making a big money move. A friend. An advisor. A fellow investor. Just discuss what you’re doing with other people. “Everyone you meet has something to teach you,” the saying goes. At worst, they give advice you don’t agree with and can ignore. More often, they’ll provide prospective and help shape your thinking.

So I request you to be my friend, advisor and a fellow investor from here on.

As for me, I promise to be your friend, your advisor and your fellow investor starting right now! :-)

Thanks once again…

Looking forward to continuing this wonderful journey together and doing much more in 5th year. For starters, I rededicate Stable Investor to helping readers Invest Better, put their Personal Finances in order and achieve their financial goals using Common Sense.


16 November 2015

Your Parents are not your Emergency Fund. Your Children are not your Retirement Fund.

Your Parents are not your Emergency Fund. Your Children are not your Retirement Fund. Strong and thought-provoking statements. Isn’t it?

Parents Children Emergency Retirement Fund

I am sure many of you will be having gut-wrenching experience right now after reading the title of this post. And many of you will also be feeling scared about your financial unpreparedness. But if that is not the case, then you are a lucky person who is doing just fine. You are not dependent on your parents for handling emergencies. And you are also well on your way to create a big-enough retirement corpus, which will not make you dependent on your children for post-retirement expenses.

But if you do depend on your parents for getting out of financial emergencies and you think of your children as your retirement funds, then I have only one advice for you.

You need to do something about it urgently. And you need to do it now.

If you are young or middle aged, and if you still need to ask for money from your parents to get over financial emergencies, then something is wrong somewhere. Isn't it? Now when I say financial emergencies, I am not talking about taking money from parent’s to invest (generally people do so to buy real estate / property). I am talking about instances like regularly running out of money before month-ends, being unable to pay credit card bills, car loan EMIs, etc. If these things happen once in a while, it is fine. But if such occurrences are regular, then you know that there is a problem. Either your expenses are exceeding income unnecessarily or you are not planning your future expenses properly. The situation can go out of hand very quickly. I have seen it happening with my well-earning friends. They earn well. But they are still broke for all practical purposes.

Creating an Emergency Fund is one of the first things any young person (or anyone who hasn’t done it) should do. A good target for this fund can be to accumulate 6 month’s worth of expenses (including EMIs if possible). It might sound tough to do. And I will not mince any words here – The fact is that it is not easy. And when someone has a habit of spending a lot (even more than his income), it is all the more difficult. But it is the right thing and it has to be done.

Also, even if your parents are financially capable of helping you in your financial emergencies, don’t build that thought into your financial planning assumptions. Stand on your own feet. Your parent’s have already done a lot for you in last few decades. Why treat them as Emergency Funds now?

That was about parents and taking their help for current expenses. But what about your retirement plans?

Are you doing fine? Are you not sure about it? Or you know that you are not doing fine?

If your idea of retirement is that your sons and daughters will (happily) take care of you in your non-earning days, then frankly speaking, I don’t know what to say.

I just hope your children do as you expect them to do.

And I pray for you. Because if they don’t, then it’s will be a very scary situation to be in.

No one wants to end up in an old-age home. I have been there many times as we regularly donate a part of our family income for helping old people. And what I see there is unexplainable. One can only feel the pain of senior people when one visits these homes. My suggestion to readers is that atleast once, everyone should visit an old-age home. You will only realize what I mean when you are there.

But coming back to our main discussion - if you are not preparing well for your retirement, then that is wrong on your part. Plain and simple. See… I am sure you have full faith on your children. But not doing anything on your own is a clear case of inviting trouble.

Now I may sound wrong here, but if you are spending every rupee you earned on your children’s education and marriage, and are not planning to save much for your retirement, then you got it all wrong. Helping your children is your responsibility. And so is helping your own older self in future when you are earning ‘0’ active income. There is absolutely no justification for not doing everything in your power to ensure that your retirement is comfortable.

So to cut a long story short, if you think that your children are your retirement fund, then you are neither being fair to yourself, nor to your children.

And you need to do something about it urgently. And you need to do it now.

PS – Talking of parents, here is a beautiful and thought-provoking post by Vishal of Safal Niveshak - which I recommend everyone to read: A Tale of 2 Fathers.

9 November 2015

A Small Guide I refer to when Investing in Stock Markets

Before I write anything about this guide, let me briefly define my approach towards money (and life in general).

I love investing in stocks. But its more because I like the process of investing, than for my desire to be rich. Though I would prefer to be rich than to be not-rich, money still does not mean everything* to me. I don’t loose my sleep over it. I don’t want to be the richest man in graveyard. I want to do things that I enjoy – Be with my family and friends, Travel, Read and Write (and maybe continue doing strange things).

*This reminds me of an interesting line by James Altucher - "Money is not everything. Its a side effect. Its a byproduct."

Having said that, I also feel that if my approach in stock markets is not based on my above mentioned preferences, then it is bound to create a disconnect between my real personality and my investing personality – which will become a cause for sleepless nights (which I don’t want). So I created a small guide for myself. I shared this few months back on Twitter too. Since many readers here are not active on Twitter, I am sharing the guide here.

It is simple enough for everyone to understand. It is based on an easily available market valuation indicator – the P/E Ratio (which is available here).

You too can use this guide as it is or modify it to suit your own personality. So here it is…

Guide Investing Stock Markets

As many of you would have observed, the guide is more about avoiding mistakes than anything else. 

It pushes me to keep investing when markets valuations are reasonable.

It pushes me to invest even more, when valuations fall further.

And it also pushes me to disconnect (and take a holiday) from markets, when valuations reach unreasonably high levels.

The guide also does not mention anything about selling. That is primarily because the decision to sell is driven more by change in original investment thesis, requirement of money, availability of better investment avenues, etc. and not just broader market valuations.

Caution: The above guide does not mean that reasonably priced good stocks are not available when markets are overvalued (say PE > 26). The ‘taking long holiday’ point simply means that chances of finding a good business, selling at a reasonable price are very low in an overvalued market.

So it is best to avoid such a market and take a holiday from it. And as Charlie Munger once said:

“Tell Me Where I'm Going To Die, So I Won't Go There.”

It is as simple as this. If the cost of not venturing into a highly overvalued market is that I may miss out on a few future multibaggers, then so be it (known as FOMO – Fear Of Missing Out).

I prefer not making big mistakes. I prefer return Of capital more than return On capital.

But that does not mean that I invest only in safe products like PPF, NSC, Fixed Deposits, etc. I have absolutely no doubt about equities and equity-linked products (MFs) being the best bets for long-term wealth creation.

Infact, it has already been proven. Want another proof? Here it is.

Another thing which I continue doing irrespective of market valuations, is to keep pumping money in my mutual fund SIPs. So you can take that as a confessional disclaimer from my side – that no matter what, I am always invested in markets. :-)

Note – This guide is not a hard-and-fast rule book that I follow. It simply helps me stay on track with my investment philosophy and more importantly, helps me avoid making mistakes.

28 October 2015

How do I accumulate Rs 1 Crore in 10 years?

How to save Rs 1 Crore

A reader sent me the following query:

“Dev, I want to save Rs 1 crore in next 10 years. I want to take the least possible risk and don’t want to put all my earnings into savings - as I also want to enjoy my life. So to put it very bluntly, I want to contribute the minimum possible amount every month, to achieve my goal. What should I do?”

I was really happy to see the brutal honesty of the reader. Isn’t this exactly what all of us want?

Least risk - Minimum investments - Maximum Returns.

Wouldn’t our lives be financially perfect if we could achieve the above 3 conditions by investing in just one product?

But I am sorry. It does not happen in real life. So lets move on...

Now if the reader had a time-horizon of 15 years, I would have suggested PPF. But even that has a limitation that I will just come back to in a bit.

Putting roughly Rs 27,000 a month in this least risk instrument for 15 years would have created a corpus of Rs 1 Crore after 15 years. Now this is assuming that PPF rates stay at atleast 8.7% for next 15 years. But as already mentioned, the limitation of this brilliant instrument (PPF) is that it does not allow an investment of more than Rs 1.5 lacs in any given year. So Rs 27,000 a month cannot be invested in PPF. Also the tenure is 15 years. So PPF is out of question for the reader.

The tenure here is 10 years. So even if some instrument gives a post-tax return of 8.7% in 10 years, then it will still create a corpus of only Rs 51 lacs (for a contribution of Rs 27,000 a month). That’s a solid 49% less than what is required. To achieve Rs 1 Cr from a 8.7%-assured-return-instrument, monthly contribution has to be around Rs 53,000.

For most people, it is not possible to invest this amount every month. Especially for the reader who says that he wants to enjoy his life too and not just save for future. Personally, I am glad to see someone giving more weightage to living life today, rather than just focusing on saving for future. Infact, it reminds me of one of my favorite quotes which I regularly use when I talk to people:

“No point being the richest man in the graveyard.”

Coming back to the question of accumulating Rs 1 Crore in 10 years. So either the monthly contribution needs to go up (from Rs 27K @ 8.7%), or the return expectations need to go up (and with it, the risk being undertaken). In this particular case, I think both will have to be increased.

So if the reader is willing to move away from his low-risk strategy (which he should, considering a long enough time horizon of 10 years), then things can actually work out. Now I am not sure what amount the reader can comfortably manage to invest every month (He did not provide me with other details). But I am assuming that if he intends to save a big 8-figure corpus in 10 years, he will acknowledge the fact that he would need to make some sacrifices today. That’s how personal financial related mathematics works.

With that settled, lets focus on the expected returns. PPF delivers 8.7%. Any instrument that gives lesser is not worth discussing here.

This leaves us with the task of choosing a suitable rate of return, which is higher than 8.7% and which is more importantly, realistic. Equity MFs have delivered returns exceeding 15% in past. But expecting them to do so in future is a little risky. Its best to tone down expectations to a lower level – I personally prefer 12% - my favorite in calculations (my worst case scenario for equity MFs is 10%).

I have seen many bloggers and financial planners choose 15% and even 18%. My best wishes to them. :-) If it happens, then it will be great for them as well as for me. But if it doesn’t, they will end up with a lower corpus, not me. Why? Because my return expectations are much lower at 12%. This means that I will be making a higher monthly contribution, which will ensure that I will achieve the target corpus even if the actual returns achieved are less than 15% (but ofcourse more than or equal to 12%).

So with 12% expected returns, what is the required monthly investment for next 10 years?

Simple excel calculation shows that to create a Rs 1 crore corpus after 10 years, the reader needs to invest Rs 43,000 a month (for 120 months) and hope that fund gives an average returns of 12%.

For sake of comparison, lets see what happens when other rates (of return) are considered:

Save 1 Crore 10 Years

Now as you can see above, higher the return expectations, lower the required monthly investment. But problem with high expectations is that they are hardly met. So even if some equity funds have managed to deliver 15% in past 20 years, it is difficult to guess what returns these funds (or other funds) will give over the next 10 years. So by keeping our expectations low, the chances of ending up with less than Rs 1 crore are further reduced.

But here is a very important point to note. Agreed that Rs 1 crore is a lot of money. But after 10 years, the value of this amount won’t be equal to what it is today. And unfortunately, many people don’t realize this. Just to give a rough idea, a crore rupees today would be worth only Rs 40 lacs to Rs 50 lacs after 10 years. So as a reader, you need to keep the time value ofmoney in mind when doing such calculations.

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