{"id":100,"date":"2007-10-23T00:00:36","date_gmt":"2007-10-22T18:30:36","guid":{"rendered":"http:\/\/myfinad.com\/blog\/?p=100"},"modified":"2011-06-30T14:30:28","modified_gmt":"2011-06-30T09:00:28","slug":"waiting-for-godot","status":"publish","type":"post","link":"https:\/\/www.myfinad.com\/resources\/2007\/10\/23\/waiting-for-godot\/","title":{"rendered":"Waiting for GODOT"},"content":{"rendered":"
\"\"Publication: The Times Of India Mumbai;Date: Oct 23, 2007; Section: Your Money; Page: 46<\/div>\n
<\/div>\n
There\u2019s no point in waiting for a market correction if you\u2019re going to be too scared to invest when the chips are down. Most of us have run into a self-styled \u201cinvesting expert\u201d at one time or another\u2014someone who watches CNBC for hours every day, keeps an eye on the market, and frequently visits the local broker. One such expert is Vinod Raman, a retired corporate executive in his late sixties. <\/p>\n

<\/span><\/div>\n

Vinod follows the markets and business news channels closely. Somehow, after his retirement, he became convinced that he had developed the knack for stock selection, and was virtually a fund manager.<\/div>\n
The Ramans had an interesting portfolio of around 35 stocks and 42 mutual funds. Between 2003 and 2005, through the bull run, it did well, earning around 30% in two years. This was exceptional when compared with returns from fixed deposits and bonds, but not so great if you consider that most stocks and mutual funds delivered returns of over 50% during this period.
\nAnd what happened to their portfolio? Well, Vinod took the gloom gurus on the financial programmes on TV a shade too seriously, and made the classic mistake of trying to time the markets. He was lucky enough to ride one rally, but missed two others, because he was sitting on the fence,
\nwatching the market going up daily, and repeating to himself, \u201cThis isn\u2019t for real.\u201d <\/span><\/div>\n

\n<\/span><\/div>\n
One February evening, a renowned international doomsayer made Vinod\u2019s affliction worse by crying overvaluation, predicting a correction, and citing some rather irrelevant examples of commodities. He caused many people, including Vinod, to run for cover, from equity to cash. The Ramans sold their stocks and mutual fund holdings. Since then, Vinod has been waiting for the Sensex to come down to 10,000, as per the prediction of the TV guru.
\n
\nGoals
\n<\/strong>A friend of Vinod\u2019s suggested he contact me, so he visited my office in March, just a few weeks after he had trimmed his portfolio. We had a twohour discussion on what he wanted to do. First, he had a post-tax income of around Rs 75,000 (Rs 9 lakh a year) from savings, including senior citizen\u2019s, post office, fixed deposits and pension plans. He doesn\u2019t really need more than Rs 60,000-70,000 per month. He would like to provide Rs 50 lakh for the education of his granddaughter Anushka. He\u00a0wanted to earn 15% on his portfolio, and pay less tax. And he wanted to ensure peace of mind for himself, and spend more time with his grandchild.
\nHe valued spending time with his family, and wanted to take vacations with them. But even\u00a0though he was retired now and his time was his own, he was preoccupied with his stock investments and with the need to keep an eye on them. As he said, \u201cI need to keep a constant eye on my money. You never know what could happen.\u201d
\n
\nRecipe for disaster?
\n<\/strong>I figured I had a tough job on hand. I said, \u201cInvesting is no sport. Constantly monitoring your investments could be a costly exercise, and I want to be sure you completely understand the consequences.\u201d I asked him a few questions: wouldn\u2019t you rather be doing something else with your time than monitoring investments, something that would give you the peace of mind that you are yearning for? What would have happened had you not actively monitored your portfolio and tried to predict the next correction? Why didn\u2019t you invest during three out of four corrections that did, in fact, occur in the past few years? After all, that\u2019s\u00a0what you were waiting for\u2014corrections. I added that more money was perhaps lost while waiting for corrections, rather than actually going through corrections.
\nVinod explained, \u201cI always thought the market would go down further, and that it was wiser to wait some more. Besides, this international advisor I follow is confident that the market is overvalued and likely to drop below 10,000.\u201d <\/p>\n

It makes sense to wait for a correction, of\u00a0course. But one needs to put in the money when the correction occurs\u2014especially since the opportunity was anticipated. You will never get the perfect bottom or top; the best you can do is ensure you made good money by being in the middle and taking advantage of corrections by investing during dips. Of course, you should be cautious on the upside. One\u00a0strategy is to take out 10% of your capital with every 10% rise. Any other strategy that satisfies the logic of buying low and selling high would work just as well. But waiting to buy low, then not buying low but just watching the market rise, and then buying high, is a recipe for disaster.
\n
\nAssessment
\n<\/strong>We made a detailed assessment of the Ramans\u2019 current cash flow, net worth, insurance policies, investments, and tax returns. We found that their\u00a0equity portfolio, which had once consisted of 35 stocks and 42 mutual funds, had dwindled to two stocks and several floating rate funds. He whittled down the equity portfolio in February\u2014during a decline\u2014with a view to re-entering the market at 10,000.
\nBecause his portfolio had been very aggressive, it had given him many sleepless nights. His target retirement income was not hard to achieve, as he had a\u00a0substantial pension from his employer, and a sizeable interest income. He had invested up to the permissible limit in senior citizen\u2019s and post office monthly savings plans\u2014Rs 15 lakh each in his own and Vidya\u2019s name in senior citizen\u2019s plans, and Rs 6 lakh in post office savings. This, along with his pension income, comfortably addressed the couple\u2019s needs.<\/p>\n

Vinod had moved almost Rs 70 lakh from equity mutual funds and stocks, to floating\u00a0rate funds and his savings account. In the process, he almost completely missed out on two rallies. By the time he met me, in March, we were able to take advantage of at least part of the rally, although he had missed a good part of that as well. Being cautious to manage risk is one thing, but moving entirely out of equity when the market is volatile and bullish is not a good move.
\nVinod and Vidya have a good medical insurance cover, and all their family obligations have been met. Based on this assessment, we created a comprehensive investment strategy, whose highlights are below.
\n
\nInvesting strategy
\n<\/strong>We staggered the Ramans\u2019 investments, and started making investments in quality blue-chip stocks and mutual funds. We allocated investments in four stocks and two mutual funds, worth Rs 16 lakh, towards Vinod\u2019s goal of providing for his granddaughter\u2019s education.
\nWe moved around 60% of his cash into equity in March, taking advantage of the fall in the market. We achieved the target of 40% savings in equity. In July, when the equity component grew to 55%, we rebalanced the portfolio by selling around 15% of equity holdings and putting the money in fixed maturity plans. This stood us in good stead, as it insulated the Ramans from the market decline in August. We decided to scale up the equity exposure again when it comes down. Sure enough, 20 days later, the Ramans\u2019 equity exposure was down to 30%, because we sold, and because the markets dropped. Now we added equity, so that it comprised 45% of their portfolio. Equity exposure in mid-September climbed to around 60%, so we pruned it back to 40%.<\/p>\n

Vinod felt he had made enough money, and wanted to get out of equity completely, and try his hand at timing again. But timing the market is very difficult, especially in strong bull markets. The best thing to do is adjust your asset allocation and book profits if they are substantial. But be prepared to buy after a significant drop\u2014anddrop it will, because no market can have a one-directional run. Don\u2019t wait for the perfect bottom; a significant drop is enough.
\nWhenever the markets next come down, we expect to see Vinod\u2019s erstwhile gloom guru on TV, saying \u201cI told you so. The market will go down another 5,000 points or so.\u201d But Vinod now has a clear plan: he isn\u2019t going to wait for the perfect bottom (which is impossible to time, anyway). When stocks are down more than 10-15%, he will start buying.<\/p>\n

It is, of course, possible that markets could go down at a slight provocation. Surprisingly, people who are otherwise perfectly rational don\u2019t have the nerve to invest when they see red on the screen. The fact is, waiting for corrections is not an investment action; it\u2019s what you do during corrections that really counts.
\n
\nAmar Pandit is a certified financial planner and
\nDirector, My Financial Advisor<\/strong><\/p>\n

<\/span><\/div>\n

\n
<\/div>\n<\/div>\n

To read the original article click here<\/a><\/p>\n

<\/span><\/span><\/span><\/span><\/p>","protected":false},"excerpt":{"rendered":"

Publication: The Times Of India Mumbai;Date: Oct 23, 2007; Section: Your Money; Page: 46 There\u2019s no point in waiting for a market correction if you\u2019re going to be too scared to invest when the chips are down. Most of us have run into a self-styled \u201cinvesting expert\u201d at one time or another\u2014someone who watches CNBC […]<\/p>\n

<\/span><\/span><\/span><\/span><\/p>","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[4],"tags":[],"class_list":["post-100","post","type-post","status-publish","format-standard","hentry","category-financial-planning"],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"jetpack_shortlink":"https:\/\/wp.me\/p2k6Pa-1C","jetpack_likes_enabled":true,"_links":{"self":[{"href":"https:\/\/www.myfinad.com\/resources\/wp-json\/wp\/v2\/posts\/100","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.myfinad.com\/resources\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.myfinad.com\/resources\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.myfinad.com\/resources\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.myfinad.com\/resources\/wp-json\/wp\/v2\/comments?post=100"}],"version-history":[{"count":4,"href":"https:\/\/www.myfinad.com\/resources\/wp-json\/wp\/v2\/posts\/100\/revisions"}],"predecessor-version":[{"id":102,"href":"https:\/\/www.myfinad.com\/resources\/wp-json\/wp\/v2\/posts\/100\/revisions\/102"}],"wp:attachment":[{"href":"https:\/\/www.myfinad.com\/resources\/wp-json\/wp\/v2\/media?parent=100"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.myfinad.com\/resources\/wp-json\/wp\/v2\/categories?post=100"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.myfinad.com\/resources\/wp-json\/wp\/v2\/tags?post=100"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}