Long-Term Goal Planning

Long-term financial goals Greater than 10 years Vital Inflation Returns Important because inflation is important Taxation Important because inflation is important

Inflation in India: Some Real Numbers Jan 1995 to May 2014

Inflation in India: Some Real Numbers

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

Risk vs. Volatility Earning more implies stomaching significant volatility in returns. Every instrument return is volatile: Bank FDs, Bonds, Gold, Stocks Volatility: notional loss in capital Risk: 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!

Beating inflation vs. Wealth Creation Returns don’t matter but they do help in conveying a point! Beating inflationWealth Creation Large investment in productive assets Unmindful of volatility in CAGR Limit volatility in CAGR Volatility should result in reward (gold is a no-no)

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 32 Lowest return: -11% Highest return: 50%

Negative returns: 2 periods out of 30 Lowest return: -2% Highest return: 45%

Negative returns: 1 periods out of 28 Lowest return: -2% Highest return: 36%

Negative returns: 0 periods out of 25 Lowest return: 3% Highest return: 30%

Negative returns: 0 periods out of 20 Lowest return: 8% Highest return: 26%

Negative returns: 0 periods out of 15 Lowest return: 12% Highest return: 21%

Negative returns: 0 periods out of 10 Lowest return: 15% Highest return: 20%

Sensex Total Returns Index: 1979 to %

S&P 500 Total Returns Index: 1871 to 2013 Source: 12%

Sensex Total Returns Index: 1979 to 2013

S&P 500 Total Returns Index: 1871 to 2013

Compounded Annual Growth Rate (CAGR) Year 1Year 2Year 3Year 4Year 5 10% Geometric Average

Sensex Total Returns Index: 1979 to 2013

S&P 500 Total Returns Index: 1871 to 2013

Normal Distribution Source:

68% of values are within 1 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 to 2013

Sensex 1979 to 2013 Annual Returns

Sensex 1979 to 2013 Annual returns

Sensex 1979 to year CAGR

Sensex 1979 to year CAGR Transformed Distribution: Square Root 14% +/- 4%

Anatomy of a bull market

Asset Allocation One should always divide his wealth into three parts: a third in land, a third in merchandise, and a third ready to hand. Rabbi Issac bar Aha, 4 century AD.

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 Risk Standard Deviation

Higher risk does not imply higher return!

Asset Allocation Time FrameConservativeModerateRiskyMad-Max < 5 YearsFD/RD~ 10% Eq 30-40% Eq> 60% Eq 7 YearsFD/RD10-20% Eq40-50% Eq>60% Eq 10 yearsFD/RD40% Eq>60% Eq100% Eq Years<40% Eq60% Eq80% Eq FD/RD 100% Eq >15 Years< 60% Eq60% Eq80% Eq FD/RD 100% Eq Time FrameConservativeModerateRiskyMad-Max < 5 YearsFD/RD~ 10% Eq 30-40% Eq> 60% Eq 7 YearsFD/RD10-20% Eq40-50% Eq>60% Eq 10 yearsFD/RD40% Eq>60% Eq100% Eq Years<40% Eq60% Eq80% Eq FD/RD 100% Eq >15 Years< 60% Eq60% Eq80% Eq FD/RD 100% Eq

Planning for our children’s future

Freefincal – Child Planner