Long-Term Goal Planning. Long-term financial goals Greater than 10 years Vital Inflation Returns...
-
Upload
norman-carr -
Category
Documents
-
view
220 -
download
0
Transcript of Long-Term Goal Planning. Long-term financial goals Greater than 10 years Vital Inflation Returns...
Long-Term Goal Planning
Long-term financial goals
Greater than 10 years
VitalInflation
Returns Important because inflation is important
Taxation Important because inflation is important
Inflation in India: Some Real Numbers
Jan 1995 to May 2014
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
Permanent loss in capital
Permanent loss in capital
Permanent loss in capital
We need to be practical!
We cannot expect more because we cannot invest enough!
Returns do not matter!yearscorpus inv(1 return)
yearsinvcorpus (1 )return
returncorpus (1 )inv years
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!
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.
Understanding the nature of stock market returns
Sensex Total Returns Index: 1979 to 2013
Negative returns: 4 periods out of 32Lowest return: -11%Highest return: 50%
Negative returns: 2 periods out of 30Lowest return: -2%Highest return: 45%
Negative returns: 1 periods out of 28Lowest return: -2%Highest return: 36%
Negative returns: 0 periods out of 25Lowest return: 3%Highest return: 30%
Negative returns: 0 periods out of 20Lowest return: 8%Highest return: 26%
Negative returns: 0 periods out of 15Lowest return: 12%Highest return: 21%
Negative returns: 0 periods out of 10Lowest return: 15%Highest return: 20%
Sensex Total Returns Index: 1979 to 2013
5%
S&P 500 Total Returns Index: 1871 to 2013
Source: http://www.moneychimp.com/features/market_cagr.htm
12%
Sensex Total Returns Index: 1979 to 2013
S&P 500 Total Returns Index: 1871 to 2013
Normal Distribution
Source: http://www.mathsisfun.com/data/standard-normal-distribution.html
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
Mutual Fund Star Ratings
Source: MorningStar.com
S&P 500 1871 to 2013
Sensex 1979 to 2013Annual Returns
Sensex 1979 to 2013Annual returns
Sensex 1979 to 201315 year CAGR
Sensex 1979 to 201315 year CAGR
Transformed Distribution: Square Root
14% +/- 4%
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?
Portfolio with 50% equity and 50% debt
Asset Allocation
Maximum Loss: worst case scenario
Higher risk does not imply higher return!
Return
RiskStandard Deviation
Higher risk does not imply higher return!
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