August 2001

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Vol. I Number 2

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Ashok Raturi* is an Electrical engineer from IIT Delhi. He completed his MBA from IIM Bangalore with specialization in Finance.

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