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Wuzz
up dude ?
So
what’s up ? Well, let’s see. DJ Industrial is down 5% this
year. DAX is down 9%, Nikkei is down 10% and oh yes, good old
London is down about 12%. Our home Toronto (TSE300) is down
about 15% and finally, to crown it all, dear ole Bharat
(BSE200) is down about 25%! Pardon me for not mentioning a few
exceptions like Mexico, Australia etc. that have actually
posted positive numbers this year. In short, globally the
markets and consequently, the investors have been
‘depressed’ for over a year now. Considering that prior to
that we were having a great Bull market for a very long time,
the arrival of the Bears has ruined the party for a large
number of investors.
So
when did it all begin? Last summer with the onset of
Technology sector meltdown? Did it have anything to do with
the preceding breathtaking rise in the darling of technology
stocks the NASDAQ composite? You remember someone referring to
‘irrational exuberance’? Then there was that changing of
guards between the ‘old economy’ and the ‘new economy’.
The global village tied together with the internet, linked
with super fast communications, and of course the
biotechnology revolution…..all that was going to change our
lives the way we know it.
What
does all this do to our financial plans and investment
strategies? Have the market forces undergone a fundamental
change and if so, should we discard our old financial tools
and invent new ones? To understand this let us do a quick
recap of what financial planning is all about. Your Net Worth
(assets less liabilities) represents where you are today,
financially speaking. This is what you have managed to
accumulate so far. Let’s call this point ‘A’. You have
some financial goals….retirement, children’s university
education ($10-15k/yr in Canada), reduce taxes (we are one of
the highest taxed countries and we are working hard to be
number one!) etc. Each goal would have a time frame (retire in
30 years) and a dollar cost ($5000 per month income at
retirement) associated with it. Let’s call one of these
goals as point ‘B’. A financial plan would examine these
goals in light of your current financial situation (Net Worth
& Cash Flow) and suggest workable strategies for achieving
those goals. This effectively is the path that takes you from
point ‘A’ to point ‘B’. Some of these paths may
involve investing money such that the future value of these
portfolios is sufficient to meet the cost of the particular
goals. For each of these investments the ‘time frame’ is a
critical factor.
Why
is ‘time’ a critical factor for investments? Well, time
represents your ‘investment horizon’. Every investment has
a time horizon associated with it. For example, money deposits
with banks etc. guarantee you your principal and may be
suitable for investments with a short time horizon. At the
other end of the investment spectrum we have investments
related to stocks (oh those wonderful tech & biotech
stocks) which do not guarantee the principal but do promise (not
legally enforceable, unfortunately) considerably higher
returns on your investment. These investments are
‘volatile’ meaning that over short periods of time their
prices may fluctuate dramatically. Which means that such
investments may not be suitable for an investor with a short
investment horizon. For example, if you had bought Nortel,
Canada’s pride & jewel, last year at $120 hoping to make
a ‘quick buck’, you would be lucky to get $15 today. In
other words you are out of luck. On the flip side you would
have learnt the value of picking investments consistent with
your investment goal.
So
what is an investor to do in this stock market? Back to basics.
Fundamentals. Simple as that. Do you have a workable financial
plan? Why are you investing? What is your investment (time)
horizon? Do you have the time and the financial wherewithal to
weather the storm? For short-term goals (buying a car in 6
months) use simple guaranteed investments. For long term (e.g.
retirement for people south of 60) consider stocks related
investments. If you like a new sector in it’s infancy (biotech?)
and you have a long term horizon (and the appetite) then
consider mutual funds instead of individual stocks. And always
ask yourself ‘Am I an investor or a Speculator?’ If you
are an investor odds are you’ll get through the mess we are
in today. If you are a speculator, you may want to search the
net for keyword ‘Prozac’.
*Ashok
Raturi is an Electrical engineer from IIT Delhi. He completed
his MBA from IIM Bangalore with specialization in Finance.
After pursuing Project Management for some time, he moved into
the field of Financial Planning 8 years ago. He now has his
own financial planning practice for individuals & families
where, in his words, he ‘happily dispenses advice, financial
& otherwise’. He may be contacted at ashok@rifp.net.
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