long-term goal planning. long-term financial goals greater than 10 years vital inflation returns...
TRANSCRIPT
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Long-Term Goal Planning
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Long-term financial goals
Greater than 10 years
VitalInflation
Returns Important because inflation is important
Taxation Important because inflation is important
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Inflation in India: Some Real Numbers
Jan 1995 to May 2014
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How to beat inflation?
• Seeking more returns vs investing more
• Investing more is safe, as efficient but not as intelligent
• Seeing returns:
• frees up money for other goals
• potential to get a higher corpus
• makes money work harder
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Permanent loss in capital
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Permanent loss in capital
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Permanent loss in capital
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We need to be practical!
We cannot expect more because we cannot invest enough!
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Returns do not matter!yearscorpus inv(1 return)
yearsinvcorpus (1 )return
returncorpus (1 )inv years
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Reality!• Very few of us can afford to invest the amount
necessary for our long-term financial goals
• This means most of us require significant equity exposure for long-term goals.
• However an aggressive investment strategy should not be combined with inflated expectations.
• Goal planning is a continuous and dynamic process. What looks insurmountable now, would look less daunting a few years down the line. So vital to act immediately!
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No Free Lunch
• If we say no to volatility, ignore inflation and do not invest enough, we risk permanent loss of capital due to inflation
• If we say yes to volatility, we need to understand volatility management, monitor investments with respect to appropriate benchmarks and understand that returns are not guaranteed.
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Understanding the nature of stock market returns
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Sensex Total Returns Index: 1979 to 2013
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Negative returns: 4 periods out of 32Lowest return: -11%Highest return: 50%
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Negative returns: 2 periods out of 30Lowest return: -2%Highest return: 45%
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Negative returns: 1 periods out of 28Lowest return: -2%Highest return: 36%
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Negative returns: 0 periods out of 25Lowest return: 3%Highest return: 30%
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Negative returns: 0 periods out of 20Lowest return: 8%Highest return: 26%
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Negative returns: 0 periods out of 15Lowest return: 12%Highest return: 21%
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Negative returns: 0 periods out of 10Lowest return: 15%Highest return: 20%
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Sensex Total Returns Index: 1979 to 2013
5%
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S&P 500 Total Returns Index: 1871 to 2013
Source: http://www.moneychimp.com/features/market_cagr.htm
12%
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Sensex Total Returns Index: 1979 to 2013
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S&P 500 Total Returns Index: 1871 to 2013
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Normal Distribution
Source: http://www.mathsisfun.com/data/standard-normal-distribution.html
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68% of values are within1 standard deviation of the mean 95% of values are within 2 standard deviations of the mean
99.7% of values are within 3 standard deviations of the mean
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Mutual Fund Star Ratings
Source: MorningStar.com
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S&P 500 1871 to 2013
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Sensex 1979 to 2013Annual Returns
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Sensex 1979 to 2013Annual returns
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Sensex 1979 to 201315 year CAGR
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Sensex 1979 to 201315 year CAGR
Transformed Distribution: Square Root
14% +/- 4%
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Asset Allocation
Finding the balance between risk and reward
How much should my equity exposure be?
Should it decrease with age?
Farther the goal, higher the equity exposure?
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Portfolio with 50% equity and 50% debt
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Asset Allocation
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Maximum Loss: worst case scenario
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Higher risk does not imply higher return!
Return
RiskStandard Deviation
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Higher risk does not imply higher return!
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Asset Allocation
Time Frame Conservative Moderate Risky Mad-Max
< 5 Years FD/RD ~ 10% Eq 30-40% Eq > 60% Eq
7 Years FD/RD 10-20% Eq 40-50% Eq >60% Eq
10 years FD/RD 40% Eq >60% Eq 100% Eq
10-15 Years <40% Eq 60% Eq 80% EqFD/RD100% Eq
>15 Years < 60% Eq 60% Eq 80% EqFD/RD100% Eq
Time Frame Conservative Moderate Risky Mad-Max
< 5 Years FD/RD ~ 10% Eq 30-40% Eq > 60% Eq
7 Years FD/RD 10-20% Eq 40-50% Eq >60% Eq
10 years FD/RD 40% Eq >60% Eq 100% Eq
10-15 Years <40% Eq 60% Eq 80% EqFD/RD100% Eq
>15 Years < 60% Eq 60% Eq 80% EqFD/RD100% Eq