The investments thread

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I wanted to know if there is any health insurance plan that is worth taking ATM. I am self-employed currently and will soon cease to exist as a dependant so the protection plan offered to my father via his bank won't apply on me any longer. I have also considered a term life insurance policy alongwith a good health insurance. I am yet to do proper research but would like to hear the options subscribed to by my TE mates.

@avi - Nothing will give you better returns, both monetary and emotional, than doing something of your own with that money. I invest back all of my profits( what's left after my impromptu splurges) into my business. You can try your hand at things you are passionate about as IMO, that is one of the key aspects, at least for me, in a business. So even trading in stocks can be exciting if done with proper research and you find it to be invigorating for your grey cells.
 
I also came across one book, suggested by few, One Up with Wallstreet by Peter Lynch. Don't know how good it is.
 
Peter Lynch's book is good.

Most people shy away from stock markets and rightly so. It is risky, but most (but not all) of the risk comes from not knowing what to do. In my experience, there is no particular method that works for everybody. Every one needs to find a method that is tailored for his psychological make-up, strengths and weaknesses. One could be great at making money in Intra-day trading, some may be gifted at finding deep value stocks that become multi-baggers over 5-10 year periods, whereas many would be better off investing money in good balanced mutual funds for the long term and sit tight. Asset allocation, though financial literature would make you believe otherwise, is highly individualistic. For instance, I may be comfortable having 70% of my entire money in stocks even when I get to be 70 years old. Another person may be comfortable holding 80% of the money in FDs even when he is only 25. It depends not only on the 'risk taking ability' (which most people have in abundance when they are making money in the market, but lose it along with the money when things go bad), but information, knowledge and temperament as well.

Having money to invest and finding a good method to do it is just one part of the problem. Temperament plays a huge part, which many people lack. Take some time to read up and know what you are getting into before investing money. Start with a small amount of money that you can afford to lose without affecting your quality of life. Experiment with it, figure out what works best for you and take it from there. I lost a lot of money initially, but I have also recovered much more than what I lost. Making mistakes is not a problem at all, I still do. But, you should just make sure that you do not suffer heavily from your mistakes. One of the vital things for that to happen is to continuously re-assess your actions. The other important thing is to learn to hear everything, but think in isolation. One of my favorite quotes about mistakes comes from George Soros
Once we realize that imperfect understanding is the human condition there is no shame in being wrong, only in failing to correct our mistakes.
Click to expand...

As for now, if I were you, I'd choose to be more conservative.
  1. Make sure you have adequate health insurance cover. Medical inflation moves at a much faster rate (20-25%) compared to normal consumer price inflation. This may already be covered in your case.
  2. Do you have dependents right now? Use HLV Calculators to arrive at an approximate cover. While this may be enough for now, as you get older, responsibilities increase, life styles change, this cover should be increased in accordance with the inflated prices. So, you can add more term policies as you go along.
  3. Create an emergency fund deposit. Keep say, 6 months worth of expenses in it. Add to this as and when monthly expenses keep increasing.
  4. If you do not need it at all for the next 3 years, better to keep it a FD. If you have, say ~ 3 lakhs left after 1-3, you will get 27K interest @ 9%. TDS will eat away 10.3% leaving about 24K or ~ 2K per month. If you want to play it safe, you can invest this in a RD to earn a bit more. Alternatively, you can route ₹1000 of it to a balanced / equity fund and ₹1000 to RD. It won't add greatly to your corpus, but RD will keep part of your interest safe, while investing through SIP will gain you some experience about the vagaries of the market - ups, downs, the whole dance. Be prepared to mentally write off the whole amount invested in the Equity part. It may gain 30% or lose 50%, but your original capital will still be intact.

    In the mean time, gain knowledge. Subscribe to some magazines and/or read some financial web sites on a regular basis. Outlook Money is good for starters. It will give you good many ways to invest money (the bright side). Then you can subscribe to MoneyLife to get the alternate side of how many crooks exist in the finance industry (the ugly side). Buy some books, read them and see if you want to do it on your own, go the MF way or you are better off focusing more on upgrading your skills. Whatever excess amount you earn in the mean time can be used for investing further in your preferred route.
 
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Gold:

Gold is a hedge against Inflation. Gold is not a hedge against Equity markets. It may have worked in recent years due to Helicopter Ben, but it has not always.

Here is the analysis of last ten years of returns: http://www.vips.edu/vjr_causal.pdf

Another one: http://www.equitymaster.com/5minWra...&title=Returns-from-Sensex-vs-Gold-since-1981

Why I suggested what I suggested

From his query,
  • I assume @avi is going to earn more in the days ahead. He just does not need these funds for the next 3 years. This is not his entire networth that needs to be allocated.
  • But, since he says he needs it after 3 years, capital preservation is the key.
  • He says he does not know about investing money.
My suggestion:
  1. Investing in FD ensures safety of capital. It does not protect him from Inflation.
  2. I mentioned 6 months expenses for Emergency FD. If he is serious, he needs to track every expense and know for sure what he needs for 6 months. That, in my experience, is a good habit to have.
  3. Watching your money grow in FD is worse than watching a paint dry. If it works out well i.e., he really does not need the funds for the next 3 years, he will remember how long it took to earn modest returns. He would not make the mistake of assuming 1 Crore in FD is enough for retirement.
  4. If it goes wrong, he will know that even though we can plan all we want, life can bowl a googly any time to disrupt the plans. That will make him become nimble with his future financial plans and be alert to any changes.
  5. In case it works out, an RD + SIP combo will be decent. Again, not talking in terms of returns, but in terms of experience. When markets go up, he would wish that he had invested more in the Equity portion and when the markets go down, he would know that RD was a better route. In the end, if all goes well, he would have experienced volatility of markets in the short term, need for safe keeping some funds away from the markets, but also (hopefully) returns from equity over the longer term.
    More than anything, this would induce discipline - not to touch your excess funds. Secondly, it will help avi learn about his own risk appetite.
  6. In the mean while, if he gains knowledge, he can experiment with a small portion of what he earns in stocks, add more to existing SIP, start another SIP etc., etc.,
That was my intention for this suggestion. What you read from other's views (including mine) is just information. When you take the idea and implement in a manner that suits you, it becomes knowledge. Information has limited shelf life, knowledge becomes ingrained into the psyche.
 
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@esantosh only yours post was lost, if you remember your contents of your post it would be nice if you can re-post
 
@esanthosh to answer your number of years of experience question (before the site crash) - I wasn't sure if it was a genuine query or rather a response "oh yeah? and how many years experience do you have?" to my post where I said you missed something. Now in light of the current post I think it was latter. It was never my intention to offend anyone. And I certainly don't intend to start a academic and link posting contest about why, what is what. Hence, editing my post.
Thanks for the discussion.
 
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@abhi1984,

No! I was just curious and there was no need to edit your post. If you had genuinely answered, I had a few follow-up queries on your hedging method which I'd have taken via the PM route. What has it got to do with number of years? If you had started investing prior to 2008 crash and had employed hedging, I would have a loads more to learn from you. If not, it is still something I do not employ. It is not just the 'number of years' I was interested in, just the situations in which you have deployed them.

Other than that, if my absence from this thread would help you concentrate on helping avi, so be it.
 
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esanthosh said:
@abhi1984,

No! I was just curious and there was no need to edit your post. If you had genuinely answered, I had a few follow-up queries on your hedging method which I'd have taken via the PM route. What has it got to do with number of years? If you had started investing prior to 2008 crash and had employed hedging, I would have a loads more to learn from you. If not, it is still something I do not employ. It is not just the 'number of years' I was interested in, just the situations in which you have deployed them.

Other than that, if my absence from this thread would help you concentrate on helping avi, so be it.
Click to expand...
My bad then. Its rather difficult to understand motivations in written form and I keep getting them wrong.
To answer your question its been approx 7yrs - started out in 2007. So been investing in Helicopter Ben era.
As for the gold thing, there are certain things which need to be clarified:
a. Hedge doesn't necessarily beat or match returns the security it is trying to compensate for. It just acts as a mitigation factor.
b. Mitigation will be driven by the correlation between assets
c. The amount of mitigation is based on how your portfolio is structured
d. There need not be a cause and effect relationship between the assets (I guess that is what is driving the vips paper you attached? Cause I really can't make heads or tails of it )

Putting things into context, say a conventional 60-40 allocations from a generic American investment book where 40 denotes bonds (all figures in US markets)
a. IIRC you might find the same distinction you made against gold - the rates of returns of bonds might not have been as good as stocks
b. The failure of 60-40 is precisely because it assumes a linear correlation between stocks to bonds which is not true
c. During 2008, a 20/80 would have netted you profit, a slim one at that. 60/40 would have been murdered. To wit, a 10yr Indian government bond during the 2008 crash would have saved you from the initial shock but the moment it turned into a risk off crash even that cushion was taken away.
d. There is no cause and effect relationship between bonds and stock doesn't exist.

Now the problem is in India (at least by my search), a retail investor doesnt have access to actively participate in government bonds directly. The best we get is to buy a postal scheme or a government scheme via SBI, ICICI et al which are fixed Bonds Ledger Account and non-transferable. There have been attempts to launch IRD futures (or futures based on bonds and used to hedge against interest rate movements) but they have ended in failure and low volumes. So any equity:bonds build is rather difficult to achieve. I alternatively did buy LIQUIDBEES an ETF from GS which is based on bonds. The pricing made my head spin so I had to let it go.
The next logical thing to be used as hedge is gold. To wit from the same vips document "......, but it tends to accurate reflector of short term fear about the economy in general." So while holding gold long term might not be a very wise decision (or rather have been one during Benarke put being in place), it will certainly save you some if and when there is a fear about economy.
Now again, it isn't as simple as buy gold, buy stocks to earn returns. But a simplistic, allocation is a good start. Say I have 1 lakh which gives me (assuming price of gold to be 30k and a broad market fund to be 6k):
60k in broad market fund (say 6k * 10)
30k in 10g gold
Total 90k - 10k in FD
or
30k in broad market fund (6k*5)
60k in 10g gold
Total 90k - 10k in FD
so and so forth based on your risk appetite. Increase FD, increase gold, take your pick will be a good start. With time one can learn about correlation calculation, Modern portfolio theory and portfolio adjustment to get better at it (and eliminate those MFs idiots).

That said, I find the gold and helicopter Ben comment interesting. Are you saying gold (as a inflation hedge) is giving so humongous returns cause Ben has caused hyperinflation?
 
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pradeep200417 said:
too many jargons...:depressed:
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most of the terms have a basic dictionary meaning which can be easily found online. If you are unable to understand them in the specific context then do post here so that it can be explained and others will also benefit from the layman's explanation. Learning about personal finances is a life skill, it will take time and effort.
 
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I don't think the basics of "buy stocks" is still given here.
Granted there are "multi-baggers" that give 4-5-10x returns, but these involve a bit of Fundamental Analysis.

For the rest, say Infy, RIL, etc, they only keep fluctuating, and one needs to learn when to sell and when to re-buy these stocks.
 
I have been reading a lot and I have come across these following terms which I don't understand (& get confused) even after wiki and investopedia:

Debt fund
Index fund
Equity Diversified Funds
Balanced Fund
SIP
ETF
Gold ETF
Gold Mutual funds
Derivatives
F&O trading
FMP

Can anyone give me some simple explanation? If that is too much, then I will start asking my specific doubts with these terms, but I think it's better try to understand before I confuse myself too much :P

Regarding my first query, I thank everyone who have replied. There are many jargons & still I am trying to understand. As of now, I have kept 3L in 6 months FD.
 
@esanthosh - Looking forward to any questions you have on the above. I hope we together can help out @avi :D
Though, on a re-read it seems an hedging example (more for the sake of others than for you :) ) got deleted during formatting

Say I have 200 to invest, an allocation can be made:
100 - stocks
100 - FD
In a good year, of 15% stock returns (assuming fixed 7% returns):
115 - stocks
107 - FD
+22
What happens in a bad year, say 15% loss :
85 - stocks
107 - FD
-8 loss
I have an asset which ( a to d in a jumbled way):
b. Has 0.6 correlation to stocks ie 9% return
a. Following above, under performs stocks by a good 6%
c. I do a 1:1 allocation just for the sake of it (FD allocation remaining same)

So now it will be:
50 - stocks
50 - assets
100 - FD
In a good year
57.5 - stocks
54.5 - asset
107 - FD
+19
What happens in a bad year, say 15% loss :
42.5 stocks
45.5 - asset
107 FD
-5
So while the returns are not as good, losses are not so bad either. example is rather a simplistic one and assumes a linear relationship maintained during the bull and bear run which is not really true.
If we were to take gold, even before 2008 (example 2000 dot com burst), you will find while gold doesn't perform on par with stocks, it doesn't loose value so easily. The year-on-year return on gold will be positive (or less negative compared to stocks). This fact gets lost in the 10yr returns chart like the HDFC one.

@pradeep200417 - It is supposed to be to a bit complicated, we cant give away our secret sauce so easily :p
@Vince - good point. I believe in buying broader market than value stocks, what fundamental analysis can we do to pick some good ones?
@avi - Investopedia is a good place to start.
 
Firstly, why is everyone taking FD's into account when there are way better tax efficient options available?
 
@abhi1984,

Not sure if my queries belong in this thread. Will PM you later on :)

@avi,

Do not worry. You are trying to learn a large amount of financial jargon at one go. When I started, I too tried to make sense of things by reading Investopedia. I understood a little bit, but was left confused for the most part. Once you spend some more time, things will slowly start to become more and more familiar. That's just part of the learning curve.

I will try to think of some simple explanations for the terms you mentioned. You do not need to understand Futures and Options for now though! So, leave out 'Derivatives' and 'F&O trading' out - at least until you have a firm grasp about the stock markets.
 
^wokay, that's sounds sane :-)

Btw unless your query personal or if you want to hide some details about query, do post here itself instead of PM route. This thread is not just about me, everyone will be benefited by that :-)
 
@abhi1984

There is absolutely no need to answer if you do not feel inclined to do so. I am not sure you can answer everything, especially in an open forum. However, my interest is always in learning from practical experience rather than go by books, because more often than not, you get to experience both the good and the bad. So, do not mind if you do not feel the need to answer :)

So here are some of queries
  1. How often do you re-balance your asset allocation?
  2. How often do you review your asset allocation?
  3. How many years of data do you take into account to determine correlation between asset classes? Do you give higher weight to recent data?
  4. Hypothetical situation: Say you assume a negative correlation between two assets, but they have a positive correlation in going down. It is still not time yet to review your allocations yet. Would you allow the entire time to lapse before acting or would you act immediately?
  5. When you invest directly in stocks, do you do just fundamental analysis or do you follow TA as well?
  6. When one does not invest in broad market funds, but in individual stocks, what would you suggest? Diversification (across sectors) or Concentration in stocks you understand?
  7. In a stock portfolio, do you use equal weight allocation or use different weights based on your conviction level?
  8. For a stock portfolio, how do you determine proper hedging? Even within the portfolio, stocks can move differently - some slowly, some quickly after a long consolidation, some almost never. Then comes the different weights in the portfolio. Do you determine beta of the portfolio against a common Index and then calculate correlation of another asset, say Gold ETF, against it?
  9. Do you use derivatives - as in shorting, buying puts etc.,? If you do, would you do it against the broad market or specific stocks in your portfolio? (If you had used them in 2008, it would be interesting to know)
  10. For a portfolio which has constant buys and sells, do you think calculated time-weighted returns gives a more realistic picture of returns? (Point to point could be extremely inaccurate due to cash inflows and outflows)
 
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