Reblog: When’s the BEST time to invest Subra?

Hmm … When WAS the best time to invest you mean?

Well, the day your dad was born if you had money … this is circa 1959 .. or when your grandfather died …. or … but hey since we did not do any of those things, it has to be today.

It’s not surprising that first-time investors often worry about the timing of their initial share purchases. When you follow stories which keep saying “market is up” or ‘Market is Going down” this has to happen! It looks like you have started at the wrong point in the market’s ups and downs and it can leave you with losses even before you reach the batting crease!

But relax kiddos: Whenever you first invest, time is on your side. So the kid who started at 22 is smarter than the kid who waited till he / she turned 32. In the long run, the compound returns of a smart investment will all add up nicely. How the market was when you began will not matter if you do a sip.

Start Now!

That is what is important! Instead of wondering about when you should make that first share / mutual fund purchase, think instead about how long you will stay invested. If you are 22 years of age, you will stay invested for say 50/60 years! Different investments offer varying degrees of risk and return, and each is best suited for a different investing time perspective. In general, debt instruments like bond funds/ bank fixed deposits, etc. offer lower, more assured returns for investors with shorter time frames (say 24 months). Historically, short-term Treasury bills yielded roughly 5% per year. Savings bank gives you about 3% p.a. taxable. With inflation at 7% these rates may or may not attract you.

Longer-term government bonds like the 10-year gilt can provide higher returns – say 8% p.a. These returns could be stable only in the short run. In the long run even these bonds could be volatile.

Shares have also been very good to sensible and patient investors. Overall, the BSE’s Sensex has returned an average of 19.4% per year from 1979 to 2017 — way ahead of debt instruments. The range of the returns for stocks OBVIOUSLY much larger than the range for debt instruments over the same period. Stocks suffered a decline in 1993 – of 42%, but this was obviously the outcome of an amazing 1992 of about 241% !! It enjoyed several particularly strong years of course, and the period 2002 to 2007 took the cake when the market went up 7x in 4 years!

How long will you stay invested?

The more the time that you have to create wealth, the greater risk you can accept. This comes from having a good income, and ability to save money. And since you’ll have more time to wait out periods of bad returns you SHOULD stay cool.

If you need the money within the next five years, you should put say 70% of your money in bonds and only about 30% in shares. If you need the money within the next three years, you should also avoid long bond mutual funds – you are better off investing in bond funds with duration of 3/4 years. The lesser time you plan to be invested, the less you can afford to lose. On the other hand, shares are an attractive option for long-term goals like children’s education, long term and retirement. The higher returns are simply too good to ignore because you do not understand. Take time to learn it!

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The original post appears on and is available here

Reblog – Behavioural finance: Money illusion

Money illusion describes the tendency of people to think about money in nominal rather than in real or inflation-adjusted terms. In other words, it’s when people focus on the absolute amount of money rather than what that money can buy.

The concept of money illusion was first discussed by Irving Fisher and later popularised by John Maynard Keynes. Fisher defined it as “the failure to perceive that the dollar, or any other unit of money, expands or shrinks in value”.

In behavioural psychology terms, the issue of money illusion is an example of a broader cognitive failing known as frame dependence where perceived losses tend to have undue prominence in our decision-making.

One classic behavioural finance text showing the existence of money illusion was written by Shafir, Diamond and Tversky in 1997. It was based on experiments and real situations. Participants, for example, were presented with the following scenario:

Imagine that Adam, Ben and Carl each receive an inheritance and buy houses for $200,000.  Each sells their house one year later, but under different economic conditions. Adam sells his house for $154,000, 23% less than what he paid for it. When Adam owned the house there was 25% deflation. Ben sells his house for $198,000, 1% less than what he paid for it. When Ben owned the house, there was no change to prices. Carl sells his for $246,000, 23% more than he paid for it. When Carl owned the house there was 25% inflation.

When subjects were asked to rank these transactions in terms of success, the results showed that they were influenced by nominal values. The majority of subjects (60%) ranked Carl as having done best, Ben second and Adam third.

In real terms, the reverse is true. Adam did best because he made a real gain of 2%. Ben did second-best, making a nominal and real loss of 1%. Finally, Carl did worst, making a real loss of 2%.

The behavioural explanation for money illusion suggests that people’s thinking is driven by automatic, emotional reactions to the perceived changes in nominal values. While the calculation to account for inflation is not difficult, it involves an extra step and at least part of the brain seems strangely anchored to nominal values.

There are financial implications with this. One of the key problems is the situation where nominal increases in income are mistaken for genuine gains in purchasing power, when inflation may be diminishing the real worth of money. In fact, money illusion has been cited as why small levels of inflation are desirable for economies at least in terms of earnings growth. Having low inflation allows employers to modestly raise wages in nominal terms without necessarily paying more in real terms. As a result, many people who get pay increases make the mistake of thinking their wealth is rising, since they fail to adequately account for inflation.

In periods of rising inflation, income and prices tend to be correlated and there have been wage-price spirals where the two factors feed off each other. In periods of deflation, in theory, the process should work in reverse with downward wage price spirals, but in reality this tends not to happen. The reason is that labour is resistant to nominal wage decreases, partly due to money illusion. Unemployment tends to be the outcome because firms react to falling prices and declining profits by cutting staff.

In investment, the challenge is to make a real return on an outlay. If inflation is 3% and your investment gives you 5%, the real return is 2%. With the ability of inflation to act as a tax that erodes purchasing power over time, the best way to counteract inflation is to invest money in assets that can provide a return above inflation.

With record low interest rates, keeping money in a bank account or a money-market fund may not generate enough return to keep pace with even moderate inflation.

Despite this, the evidence suggests investors are more averse to nominal risks than real ones. Consider the “flight to safety” that occurs during most economic and stock-market downturns. Investors flood into safe assets such as bonds, which do not keep pace with inflation, while ignoring equities, despite the fact they may have cheapened considerably.

While the idea of holding cash may be emotionally appealing as it feels like a safe trade in nominal terms, such conservatism runs the risk of reduced purchasing power.

Assuming we do not strike deflation, in the prevailing environment of historically low interest rates, some analysts believe that cash and government bonds run the risk of providing negative real returns. This is encouraging many investors to look for real returns in high-yield bonds, real estate and equities.

Investors with a time horizon of five or more years should consider shifting surplus cash into assets where there is a prospect of a real return. Equities can offer attractive inflation-proofing characteristics as many companies can pass price increase onto consumers to protect their profits.

The original article appears on and appears here.

Reblog: Google Searches Offer Insights Into Asia’s Tumultuous Year

Seek, and ye shall find your queries on a year-end list.

Such is the case for Asia’s Googlers, whose most popular financial searches of 2016 have been compiled and released by the company. The data is evidence of the roller coaster year it’s been for some of the world’s biggest economies, where local political scandals roiled the markets at the same time that curveballs from outside the region heightened volatility and triggered capital outflows.

After watching $5 trillion evaporate from China’s stock market last year, investors may have thought they deserved a calmer 2016. Yet, the flurry of bad news, from South Korea’s trio of political, economic and corporate scandals to India’s shock decision to junk 86 percent of its currency bills, ensured the year has been anything but. Add to that the U.K.’s June vote to leave the European Union and Donald Trump’s shock election in the U.S., and you start to understand why China’s dwindling foreign-currency reserves lay behind the country’s most popular financial search term.

Using Google’s data, here are four charts that gauge the pulse of Asian economies in 2016.


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Reblog: 40,000 times in hundred years = 11.3%

This hard hitting article is written by D. Muthukrishnan (Muthu). The original post can be found here.

I was reading this article written by Vivek Kaul.

A bungalow in Nepean Sea Road, South Mumbai was bought for around Rs.1 lakh in 1917. It is now going to be sold for Rs. 400 crores. The value of the bungalow has multiplied by whopping forty thousand times in 100 years.

Real estate is always discussed in terms of how many times it has multiplied. Rarely anyone in that industry calculates XIRR or annualised returns. 40,000 times in 100 years when expressed in terms of XIRR is 11.3%. Not a bad return at all. But nowhere as glamorous as saying 40,000 times.

Many tell me something like that the property they bought 25 years ago has multiplied by 10 times. Sounds fantastic. But the annualised return works out to 9.6%.

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