Investment Philosophy and Strategy on r/IndiaInvestments Wiki

Basics of Investment Strategy Plan

Mon, 01 Jan 0001 00:00:00 +0000

Basics of Investment Strategy Plan

THE Basic PRINCIPLES:

It should be fairly straightforward. No need for assessment of complicated risk tolerance (graphs/psychological tests etc). Follow the KISS principle (Keep it Simple and Stupid).
Identify the objective as Maximum Terminal Value (Growth) / Regular Cash Flow or a combination of both in varying degrees.
Third objective is Capital Preservation - for those who have adequate money and now do not want to risk or have hassles. Precious FEW. Capital Preservation is also good for something like saving for a downpayment.
Capital preservation and Growth objectives are polar opposites and are not possible to get in a single instrument. Any instrument which claims to give both is an oxymoron like reality television, selfless politician, mature baby, etc.

THE Basic DETERMINANTS:

Time Horizon: Select the particular appropriate time horizon. For retirement corpuses, you should consider the life expectancy of both the husband and wife plus if you want to leave for your kids. The longer the horizon, the more equity is appropriate. For say child education (a very common goal), initially it should be in equities and as the time for actual money comes closer, an yearly or 2-yearly change of the allocation pattern according to the graph should be done. The corollary is if you need money in the next 5 years, do not invest in equities. See Graph
Cash Flow: If regular income required is upto 2-3% of the total portfolio (this is based on US data, but for our country, even 4-5% should be a safe and reasonable yield), then an all-equity portfolio is ok. If more is required, then a blended portfolio of 70:30 or 60:40 (equity:debt) is advisable. Either a SWP (Systematic Withdrawal Plan) or periodic sellings or dividends (from stocks) or interest income is advisable depending upon the instruments.
Return Expectation. It should be remembered that all asset classes except short-term debt instruments give returns in lumps. That is, for some periods the asset class will give magnificent returns for months, years to decades and at other periods, the same asset class can give flat / negative returns for similar periods.
Individual Pecularity. Best example of this is ownership of gold. Some people get a warm feeling by having this asset class in their portfolio, while others just hate having an asset class with low returns and high volatility. Although, emotional attachment to various asset classes may not the best thing to do, but if such a thing means a feeling of “All is Well” then such personal preferences should be followed.

Some important CHECKS:

Check availability of decent amount of living expenses (usually for next 6 months) in a liquid instrument, which canbe cash, savings account, short-term/liquid debt funds or FDs. Monthly Living expenses = your yearly expenses (including the compulsory and the arbitrary expenses) divided by 12.
Check Insurance requirements (life, health, car/bike, etc).

Depending upon the above criteria, the appropriate allocation into stocks, debt and others should be done.

A simple Financial Planning Roadmap

Mon, 01 Jan 0001 00:00:00 +0000

A simple Financial Planning Roadmap

Step 1: Check Insurance requirements

Check Health Insurance for you and family. If your company provides a decent amount, well and good. Otherwise, get one.
Do you have people who depend upon your income?
For most new young unmarried starters, the parents are usually not dependent on them for income (there are exceptions).
While for married people, the exceptions will be inverted. So, if someone is dependent on you for your income, get a decent life cover, preferably through an online term insurance plan (works out the cheapest).

Various types of Risks in Investments

Mon, 01 Jan 0001 00:00:00 +0000

Various types of Risks in Investments

A common definition used is ‘Risk is the uncertainty that an investment will earn its expected rate of return.” It includes both Upside and Downside Risk. Although, we like the Upside Risk (return much greater than expected), we abhor the Downside risk. One needs to understand that both are sides of the same coin and mostly cannot be separated. If you want an instrument which can give / has given higher returns than expected in the past, then in future, the opposite can happen too.

Are you a Stock or Bond?

Mon, 01 Jan 0001 00:00:00 +0000

Are you a Stock or Bond?

One way to view human life is to see it as a process of converting human capital into wealth, both financial and real. When you start out, the human capital is high while wealth is low. Midway (around 40 years), there should be assets which show the result of past 15-20 years of use of the human capital. At 65-70 years of age, the human capital is almost spent and now the wealth capital has to take care of rest of the life.

Assets and Asset Allocation

Mon, 01 Jan 0001 00:00:00 +0000

Assets and Asset Allocation

In increasing order of possibility of loss of principal:

Income yielding assets:

Cash in Bank Account.
Fixed Deposit.
Liquid funds.
Money-back policies.
Annuities
Government and state bonds.
Good quality Corporate FDs.
High yield Corporate FDs.

Growth and Income yielding assets:

Debt oriented hybrid funds.
Equity oriented hybrid funds.

Growth assets:

Blue-chip stocks and stock funds.
Dividend yield stocks.
Real Estate
Mid and small cap stocks and funds.
Penny stocks.
Put / Call options. Futures. (There is too much complexity in deciding which is riskier).

Other points to consider:

Critical Mass

Mon, 01 Jan 0001 00:00:00 +0000

Critical Mass

A state of freedom from worry and anxiety about money due to the accumulation of assets which make it possible to live your life as you choose without working if you prefer not to work or just working because you enjoy your work but don’t need the income. Plainly stated, the Land of Critical Mass is a place in which individuals enjoy their own personal financial nirvana. Differentiation between earned income and assets is a fundamental lesson to learn when thinking in terms of critical mass. Earned income does not produce critical mass……critical mass is strictly a function of assets.

Asset Rebalancing

Mon, 01 Jan 0001 00:00:00 +0000

Asset Rebalancing

Original Post

Main Ideas:

In a well-diversified portfolio, the individual investments are expected to generate a certain rate of return based upon their characteristics and risk profiles.
The returns of different asset classes in a short-term cannot be known in advance. And the markets (both debt and equity) can have significant volatility so as to throw the investors off track. In other words, the short-term performances of assets are Unknown unknowns.
Over longer periods of time, it has been shown that Regression to the mean occurs for the major asset classes. In Jason Zweig’s words - “Periods of above-average performance are inevitably followed by below-average returns, and bad times inevitably set the stage for surprisingly good performance.” Link .
By rebalancing, we are actually selling the asset class which has gone up, while buying the one which has gone down. It is the idea of Buying Low, and Selling High. Although, in practice, it is quite difficult to do for most people.

Methods of Rebalancing:

1. Calender Method – You do your Asset rebalancing on a monthly, quarterly, yearly, 2/5 yearly basis. Or you do it daily (David Swensen used to do it daily in his Yale Endowment portfolio, largely because that portfolio did not incur any taxes). There have been few studies which have shown that the frequency of rebalancing, as such, does not have any statistically significant effect over the overall return of the portfolio, provided you do the rebalancing. (I cannot get reference for that right now).

Lumpsum or SIP/STP

Mon, 01 Jan 0001 00:00:00 +0000

Lumpsum or SIP/STP

Original Post and discussion

This is quite confusing to many people, since the finance world touts SIP (Dollar Cost Averaging in foreign terms) as the best way to invest.

Definitions:

SIP (Systematic Investment Plan) = one invests a fixed amount of money at a regular interval (daily / weekly / monthly / quarterly). In short, it is transfer of money from cash to a particular asset (mutual fund / direct equity called the DIY-SIP or other such names).