War and Paise

Hi, I'm Monica Hallon and this is my podcast Let's Talk Money. Every Friday a new episode will drop that gives you a snapshot analysis of one money-related topic that has meaning in your life. And then I answer your money questions. My hope is to put you on the path to financial stability and freedom. So let's talk money. A global power struggle is not going to be painless. We know that. We know that in terms of some of the supplies that have been hit gas oil and it's not going to be painless for our investments either. And you know I see the war in western Asia really as a proxy war between China and the US with the US actually striking at the forces of energy that China depends on to run its supply chain to the world. And when two powers, one emerging and one incumbent when these big fights happen, it can last a long time or given the use of technology and weapons that we have, it can get over fast. Nobody knows the final end and the timing we don't know how this ends. But we have to live in the moment and so many people are in a panic over the investments because markets have been crashing but every time a market crashes there is a fundamental lesson that it is teaching us. And this is what I will talk about this week. So this story starts with a tweet that my friend Sushan Sarin put out. He compared the current market crash to a stock market genocide. I replied to him and I said that you know what a true market crash is 20% or more and that people who can't take a true crash should not be in the market. So Sushan and I am banned there on Twitter often it's harmless but this exchange took on a life of its own with all manner of people weighing in with comments and opinions. I will leave a link in the show notes for you to enjoy the full conversation. To this thread a big market expert posted that I should have been looking at an equal weight index rather than just a plain nifty 50 or sensex. Now what is an equal weight index? So difty 50 sensex these are called market cap weighted indices. Okay these are where the larger companies have a larger say in the index and the top 10 stocks will account for 60% or more of the index value. So when a reliance or an HDFC bank moves the whole index moves and equal weight index all 50 stocks have the same 2% weight or say in the final direction of that index. So a small FMCG company will affect returns just as much as a reliance. Equal weight indices will outperform when there's a bull run but will underperform when markets fall because typically large stocks will fall less than the more volatile smaller stocks and remember large cap is defined as in terms of market cap and the 50 stocks within the nifty 50 will have very different market cap valuations right. So the larger stocks will have a greater stay but say but the minute you do an equal weight index the story changes. This person's point of view was that an equal weight index has dropped by 30% so indeed this is a carnage but this is exactly the point. We know that an equal weight index is riskier than an index driven more by the larger and safer firms. So if you've taken the call of investing in an equal weight index you took the decision of taking on more risk. So why is there a problem when the more returns will come with greater risk? You took the greater risk and this is where the risk has come to life when markets have really crashed over a six month period. So we know that an equal weight index is riskier than an index driven more by the larger safer firms and we can expand this argument. Small and midcaps will bleed more when the markets crash and the opposite will be true where markets rally. You will gain more in a pure equity index when there's a bull run but it will also bleed more when there's a crash and you will bleed more if larger part of your money is in the riskier parts of the market than in the top safe 30 or 50 stocks. So it's a great time to understand asset allocation diversification one more time. I've run some numbers AI has been my research assistant for this maths and the results are consistent with really what I have told you over and over again. One, make a basic asset allocation between debt and equity. debt is the safer part of your portfolio. It gives you stability in markets like this. This is the reason you have debt in your portfolio so that today when markets are so volatile your portfolio is stable and within equity please split your money into large mid and small caps. Large caps are the less risky part of equity. Mid and small caps give you the return kicker when there's a bull run but drag your returns down in markets like this and third most importantly when you have fixed these ratios you must rebalance when your original ratios are off by 10%. This is really the three golden rules of investing. If you follow them you are safe. So let's look at two investors. Both have five crore each invested. Django Singh has 100% of his money in equity but even within equity he's been prudent he has 50% in large caps and 25% each in mid and small cap. For ease of the argument I will just use index funds. Mango Singh has an allocation between a debt fund which gives a 7% annual return and equity in the same proportion as Django which is 15 to 25 to 25 and his allocation is 60% in equity and 40% in debt. So mango Singh has a debt cushion. They both have the same allocation within equity between large but in small. Both are investing in index funds, nifty 50, nifty mid cap 150, nifty small cap 250. Okay now let's look at what their five crore is worth as on 15th March over the three month period from 15th Jan to March. Django lost 65 lakh. Mango lost 35 lakh over this three month period because large caps lost 11% mid caps 13 small caps 17. The overall loss to Django on his portfolio was 11%, but mango it was just 7%. Both lost, but the debt part of the portfolio cushioned the fall for mango Singh. So this is really an average story. Real-rived stories are usually much much worse because investors don't do an allocation. They don't use index funds and have a far larger concentration in mid and small cap funds. And sector funds they are far riskier than a structured allocation. This is actually an excellent time to look at your overall portfolio. How much have you lost? Blend in both your debt and equity paths and look and also look at equity in isolation. If your portfolio is showing a deep 20 to 30% drop and you're worried then your allocation is not reflecting your true risk appetite or your willingness to take risk. When you invest in equity you have to put on seat belts of building a safe cushion of debt and an allocation within equity to the less risky paths of equity. These are the golden rules of investing. This is the formula not to spend sleepless nights and worry about markets as two large powers dogfight over this tiny speck of dirt spinning around a star in this vast universe. Now onto questions. Lalita Tiwari says, "I'm Anika Ji, I've been following you since the beginning of my PR career in 2014 and have chosen to track your work over the years. Honestly, I never imagined I would approach you with a question because most of my doubts have already been addressed by your episodes. That's good to hear, Lalita. Thank you. I'm not sure whether my situation is something you'd want to cover but I genuinely want to share with you. After nearly 18 years of working, I recently decided to take a break from my normal 9 to 6 over time. I found it increasingly difficult to cope with the toxicity of work environment. Having worked mostly with the small PR agencies, benefits like gratuity were never available and the PF contributions were minimal. I am 40 plus with two children aged 14 and 9. It has been two months since I left my job. I'm aware that finding a new opportunity at this stage may take time. Our household income has reduced and realistically it may not return to the previous levels. On the positive side, we do not have a home loan. Being off our 60-lack home loan within six years was probably one of the best financial decisions we took. We do, however, have an auto loan taken last year. At the moment, my focus is on clearing that quickly, securing funds for my children's education and then strengthening retirement planning. I am hesitant to touch our investments. However, given that I might not be able to save much for at least a year, I am unsure what financial questions I should be asking right now. Should my priority be liquidity, debt clearance, education, corporate smire time and what should I be doing in this career break? Lalitna, this is a real heartfelt message and I actually think you'll get back on your feet sooner than you think. A lot of people find themselves at their point in work where you know you just want to do something different and your big plus is that your home is paid for this roof over your head is such a blessing. So from your mail it's not that super clear if there's another income coming in I sense it is if the house is running only your income then at age 40 it's too young to let go of this next 20 year earning phase but it seems there is a partner who's earning enough and it's only the savings potential which is getting hit. So there's a reduced flow of money according to me this is the waterfall for my savings your emergency fund and your insurances must be in place. If the auto loan is well below the 30% of take home even of the single income you can keep it but try and prepare as and when there's extra money because being dead free is a blessing. Next, protect your retirement coppers this might sound harsh but you need to put on your old age oxygen mask first. Look at it this way if your income begins to flow in a few years you can take a part of that retirement coppers that you've gathered and can be used for the kids higher education but at this moment when the future is uncertain I would go for my own retirement kids can win scholarships work part-time take a loan but after a certain age you know need to have the money for your own future. The investments that you've already made for your kids can just continue of course right don't break that. So you know more than money mid career breaks are a great way to rework what you really want to do and make it count. At 40 you have 20 good years left and another 20 of maybe part-time work. Try for firms that have better work cultures than what you might have seen or maybe build something of your own this is a great time to do that experiment since you've taken this call you know build something and I'll give you a suggestion on how to make it work so it's very easy to start your own business and turn it into a hobby because there's no pressure to on because there's one income coming in. So put targets for yourself that within six months I should be earning at least contributing half to the household expenses. Within a year I should be contributing so much to the household expenses so put some pressure on yourself to get that kick start in the morning to sit down and start working because when you're on your own the biggest problem is that there are no outside deadlines it's your own personal discipline but once you start doing this on your own and I speak purely from experience this is like the best thing you can ever do for yourself which is work for yourself. So Shreena was from Hyderabad I must say I've read let's talk money and I'm reading let's talk mutual funds I admit I have not reached chapter 10 yet but I want to ask this a very large lump sum of money say after a hundred of apartment sale what may be a good way to set up a systematic transfer plan for three years plus should I just do the usual liquid ultra short term or should I do STP from a medium or medium to long duration debt fund also longer duration funds carrying greater risk some of them have exit loads I also have a general suggestion regarding systematic transfer plans since it's required that the source fund and the sync fund which means fund where you collect your money and the fund where it goes to must be from the same mutual fund it reduces the flexibility of choice so what if we did an indirect STP you choose a good fund in fund a and then set up a SWP and then put that money into the fund of your choice okay so right Shreena was it's these are great questions most financial planners actually do recommend STP period of between 12 to 18 months rather than this three year period it may be longer than needed and I would seriously stay on the lower side risk side of debt and not venture into risk at all the idea is to keep this money safe and liquid and then target equity fund your idea that there needs to be flexibility between fund houses to set up an STP is actually very very good but this is something for the industry and the regulator to work through your indirect STP might have tax consequences because debt funds are taxed at a slab rate you know I find keeping my investing relatively simple so that I don't have to do so much of juggling rather than try and squeeze every basis point of return I think there is also merit in making it easy to do without having to do these complicated things I have found through my own experience the more I try and squeeze out that return the worse it might get in terms of just managing it or overlooking some part it helps to simplify your life so I would just do a 18 month STP in the same fund house and just let this thing work I hope this helps and there's Dr. Kriya Shiv Kumar who says I've recently read your book let's stop money and I cannot express enough how impactful it has been for my financial journey as someone from a middle class background I was often overwhelmed by the jargon and complexities of financial products like insurance, eulips, mutual funds however your simple clear and jargon free explanations have made these concepts accessible and actionable for me thank you Priya this is exactly my aim thank you for your guidance I now have clarity on how to approach retirement planning and set my goals for my children's future my husband who's currently 55 is set to retire in the next five years I wanted to seek your advice on our current portfolio I have a money back policy which is nearing maturity a child plan free eulips one year investment plan in insurance then their postal savings postal life insurance after reading your book I now understand that eulips may not be the best fit for my financial goals especially given the high mortality charges which are around 12,000 annually what is the best way to exit these eulips and should I continue with the postal savings plan I'm considering term in children's to enhance our risk cover I would also like to suggest that you write a dedicated book on retirement planning it'll be immensely helpful once again thank you for your contribution which is invaluable your book has truly been a game change for me thank you Priya Priya so much so I'm actually hoping you have more assets than the ones that you've listed you say that your husband has another five years to work I wonder if there is a pension somewhere in this because I'm not seeing the assets for full retirement and you've realized that bundling insurance and investment is not an optimal way to grow your money so I'm seriously helping their pension this is too late to buy a term insurance cover it'll be far too expensive don't do that you should check what eulips you have and what return they are giving eulips have a lock-in and unfortunately if you stop funding them your money is locked in for five years you could look at an exit after five but try and see what plan you have and what the returns are looking like your idea of writing a book for the retired is something many people have asked me to do and this remains one more book that I fully intend to do and that's a wrap for today I enjoy answering your money questions remember I don't look at individual portfolios I don't recommend products look upon the space as a place to ask strategy questions doubts and just basic things that you might not understand each time you have a good money outcome I feel that I have one to make sure that you don't miss an episode press follow and help your friends get money smart by sharing a link with them you can reach out to me at mail me at theratemonicahulland.com that's Monica with a k tag my social media handles at the rate Monica Hulland and finally remember that you should have money and money should not have you so let's talk money again soon bye [Music]