Jagoinvestor
October 29, 2008
A conversation with friend on avoiding financial responsibility
In this article I’m going to tell my conversation with one of my friend about investment and different investment tools. We have discussed on both advance and traditional investment tools.
Read this chat conversation with one of my old classmate in Graduation.
“Manish : So where are you going to invest you money this year?
XYZ : May be PPF or Bank FD
Manish : But do you think they would give you good returns? also they would be locked for a long time, don’t you need that money in near future?
XYZ : Not exactly!, actually I can leave that money invested for more than 5 yrs, or may be 7-8 yrs too ..
XYZ : also, But I would like to invest some money in mutual funds … around 20k, May be I need some money to send to my brother for his MBA coaching ….
Manish : hmm.. But I think you should do exactly reverse. Invest this 20k in FD and Rest money in Mutual funds + PPF or only mutual funds.
XYZ : No no, I cant !! I have already lost 50% in mutual funds this time, I cant take risk now, I am fine with less return but a secure one …
Manish : hmm… I told you don’t put all money in lump sum. You never heard !!
XYZ : I invested because I trusted you, I thought you know more than me, but it fell so much … you gave wrong advice at wrong time.
Manish : Don’t you think it was your desire for high returns which made this happen? Equity are risky? I told you this too !!
XYZ : Whatever …
Manish : ok .. np … Consider what I said … good night … 🙂
XYZ : Good night“
What is the problem of these people?
First they need high returns, then they cant wait for long term to get that kind of return. They just hear that equity are risky but don’t believe it, they will make you feel that you are responsible for the crash. They just don’t take responsibility for what they did !!
What I actually told her?
I told her that its OK to invest at these high levels but don’t invest in Tax saving mutual funds as they will be locked for 3 years, also invest less and that too through SIP (What is SIP?), so that it can eat up the volatility and insure less losses if things go wrong.
But the only things on her mind was:
- It will save her tax
- Will give superb returns like it did during 2002-2007 (these are the people who don’t read “Equity investments are risky and passed performance is not guarantee for future performance”)
- If she does SIP and markets goes up and up, she will be buying less units.
This is a classic example of “Overestimating Returns and Underestimating Risk”
How should you do your tax planning for the year?
First thing, if you have not done your tax savings yet, its a bad thing. It should be done at the start of the year itself, at least planned.
If you need money for short term goal, don’t invest in Shares or mutual funds !! Put it in some assured investment instruments like FD.
“Return of investment” is more important than “Returns from investments”.
If you have money which you can invest for long term, invest in Shares or Mutual funds (but only for long term). As per your risk taking capability choose combination of Debt and Equity and invest for the long term …
Why Equity?
Do you know that most of the stocks have beaten down so much that they have come down below than the price they deserve, There value has exceeded there price (Read about Value Vs Price).
Unitech : One of the largest and most respected Real Estate companies has fallen down to levels which are unimaginable !! from 532 to 40-50.
Tata Motors : Nano will be manufactured in some months, every thing looks so good, but people just sold it because of Singur tension (It was fine to sell it , but now its oversold).
There are countless examples like this in current market. Things will go fine, but with patience.
Thanks Manish
Nitin
About your View : Yes , you are correct , when i say SIP , i dont mean the SIP which we take while investing in mutual fund, i mean following the SIP way of investing , part by part , which we can do ourself , So better to put 25-30% of capital on in this market .
Case 1 : Market goes further down from here , which is very possible, then another chuck of capital can be invested and buy price can be averaged , Better to invest in Blue chips now , because they will be the first to recover .
Case 2 : Markets dont go further down and start recovering , in that case we are sure about two things , first is that we made some profits on 25-30% part of captial invested and now we are ready to invest more and its highly probable that they will not come down again in short term .
About Your question : I will try to put some article on this . As of now i can say these things :
– It should have strong business.
– Must be little unique
– Should be linked with the growth areas and solution to an issue , like Bharti airtel was good investment because of High user base and too big market .
Will try to write on this soon ..
Manish
Manish, I totally agree with your stand-point, SIP is the way to go.
Have a view/question:
View: During bull market, SIP sounds good but the current situation we are in is more because of Panic-driven selling, I think during these times we should put some lumpsum to make most of the situation. Any thoughts on this ?
Question: How do you analyze a stock ? I know everybody has its own ways of doing it. I read through Rohit Chauhan’s blog on value investing, I am not sure if I understand everything he is just high-fundu. If you can put down some basics that would be great whenever you have time.
Thanks
Nitin
Is Bonds the best place to be? I know you are supposed to invest in stocks when the market is down and that’s a good consideration. It’s doubtful all these companies are going out of business. Some will come back and thrive.