How the financial planners got it wrong for you?

Over the last one month I have got several messages from readers of this blog and people I know otherwise as to how their financial plan have gone totally wrong just in the space of a few trading sessions. Most people are shell shocked and are wondering how the basic strategy of SIP which was seemingly invincible has shattered so completely. While I agree that the current sell off is something no one could possibly have anticipated, the seeds of such a risky financial planning was sown much earlier through the SIP route.

The last time the stock markets in India went for a roller coaster ride was in the years 2008 through 2010 but not too many of the current investors were investing then. The whole idea of financial planning through SIP was started in full force after the 2008 January market crash. Investment in MF through SIP was touted as a big thing for planning your finances in order to meet long term goals of individuals. In the initial days SIP was promoted by many financial planners as a reverse EMI, only something that helped you build a financial asset as opposed to a home etc. The reason it became a huge success was the secular bull run that our markets had till very recently. Yes, there were many times when short term corrections were there but these were seen as opportunities to invest more in the markets.

Once the markets kept rising after 2010, the early adaptors of SIP saw great gains on their early investments and word of mouth advertisement along with the proliferation of MF agents with aggressive sales tactics ensured that it became the default choice of all the people coming into the workforce. Over the years the myth got propagated that SIP was almost like an investment in a bank FD only with a return of 12 % or more !! The investors lost sight of the risks that are part and parcel of every market. This was almost like an accident waiting to happen and it did, only the scale of it was swift and brutal. The plan of the financial planners was quite a good one, insomuch as investment in equity as an asset class for the long term is quite inevitable in a high inflation economy that we are. The error of judgement on their part is to get overly greedy and recommend that almost all investible surplus be put into equity. Investors not only kept increasing their SIP amounts but some also went into direct equity without knowing a great deal about the market and not having enough time to do adequate research.

The situation could have had a much better outcome had asset allocation been followed properly and people had 40 % of their assets in various debt instruments. Sadly, PPF and other small savings schemes were seen as stodgy and boring and even if some investors did go for debt, their choices were types such as the Credit risk funds etc which had their own problems too. The overall impact today is that the XIRR of a 10 year SIP is lower than those of PPF returns. Yes, this will become better over a period of time but a lot of the gains over the last few years have now been frittered away.

A lot of people who are readers of the blog have wanted me to advice them as to what they should do now? I am happy to answer any specific queries that you have, feel free to send it to me here or in the Facebook group. Some of you have also wanted to know if I can provide my HELP services to them. As I have said before, I do this only for a few people but in the current situation I am happy to take on a few more people. You can read about HELP program here and understand about the work I have done so far here. The people wanting to interact with me can mail me at rajshekhar_roy@yahoo.co.uk

Watch out this space for my next posts which will contain more action plans as to how you can deal with your personal finance issues now.

Personal finance has not seen such tough times before in India

These are very tough times for the whole world and especially for India. Over the last 5 weeks or so, I have been putting off writing any blog posts as I was waiting for the market to stabilize. However, the way things have been going on, that does not look to be anywhere in sight. I have also got several requests from people wanting me to write a few posts and have therefore decided to honor those requests.

To begin with it is important to understand that the situation we see today is unprecedented in the personal finance space. I have been investing for myself over 3 decades now, having started in 1988 when I joined my first job after having finished my MBA from IIM Calcutta. In this long journey there have been several ups and downs that have taken place including years such as 1990, 2001, 2008 – 2010 where the stock markets have gone through a roller coaster ride. In most of the cases the markets have bounced back over a period of time and the maxim that over a medium or long term the markets will mitigate the risks have always worked out well. Even this time many financial planners and MF houses are trying to assure investors with these same words. I am sorry to say otherwise, but the current situation will not see any quick turnaround and people thinking it will be business as usual soon, are clearly not understanding the impact.

Let me try and explain in a few points why I think so :-

  • The Covid-19 impact is worldwide and it is long term. Given the current context of losses of lives throughout the globe, the last thing countries are thinking of is business. Any return to normalcy cannot be expected unless the infections cease to occur and that seems to be 3-6 months away even as per the optimistic estimates.
  • The current problem in India is on all fronts – with MSME companies, with larger units, with migrant laborers, with exports, with manufacturing, with services etc. In short all aspects of demand and supply are affected adversely in the current situation. Also remember that we were hardly doing very well prior to the lockdown.
  • The deep cuts suffered by the indices and all kinds of stocks are actually just the tip of the iceberg. I am convinced there is more pain left in the markets yet and, what is more, I see no real possibility of the markets coming back to February 2020 levels in the next 2 years or so. It will be nice if it happens but chances are remote.
  • India will need to spend significantly to counter the effects of the virus, in supporting the jobless people through cash and kind, in providing incentives and support to the industry to be back on its feet. Our production capacity as well as demand has been seriously compromised and even if the virus goes away in the next month, it will take us more than a year to get back where we were. So in effect, the whole financial year is kind of lost to the virus if we are lucky. If we are not lucky then it can well be one more year or even worse.
  • I will specifically write about personal finance investments in terms of equity and debt asset classes, but I hope the above has given you an idea about why I feel the situation will not improve in the short run.

A lot of people who are readers of the blog have wanted me to advice them as to what they should do now? I am happy to answer any specific queries that you have, feel free to send it to me here or in the Facebook group. Some of you have also wanted to know if I can provide my HELP services to them. As I have said before, I do this only for a few people but in the current situation I am happy to take on a few more people. You can read about HELP program here and understand about the work I have done so far here. The people wanting to interact with me can mail me at rajshekhar_roy@yahoo.co.uk

Watch out this space for my next posts which will contain more action plans as to how you can deal with your personal finance issues now.