Part 3: Starting to worry about investments

Have you nominated one of your bank accounts as the "Third Bank Account"? (We can refer to this as the TBA going forward).  Have you made it investment-ready by linking it to a Demat and Trading account?  If you have not done so yet, you should seriously consider acting on it soon.

Now that we have resolved to set aside some money every month, the next problem is what to do with it?   Before addressing that question however, let us first talk about inflation.

What exactly is the meaning of ten thousand rupees?  It has no meaning except in relation to what it can buy.  What this money bought for you five years ago, is far more than what it buys today.  What it buys today will be far less than what it will buy five years hence.  Inflation, or the rise in the general level of prices eats up your money - it erodes it away slowly and imperceptibly - and before you know it, you are poorer than when you started out! 

The level of inflation keeps changing with time.  The official government statistics report inflation based on wholesale prices of a pre-defined basket of commodities.  This may be quite different from the inflation you face in your daily life since you shop in retail and your basket of consumption is different.  In the last one year, you would have noticed that prices of essential food items have increased far beyond the inflation figures reported in the newspaper.   Just check the price of Tur Dal in case you have not noticed.  Or the price of idly-wada at the local Darshini.

The technicalities of how inflation is caused and how it is computed need not bother us at this moment.  What we need to note is that money kept under the mattress, though high on the sense-of-security scale, is quite low on the sensible-thing-to-do scale!  You have to make your money grow or it becomes useless with time. 

If you have invested your money in a Fixed Deposit (FD) with a bank and the rate of interest that you earn is 8% p.a. and if inflation is, say, 6% per annum, then your nominal rate of interest/return is 8%, while your real rate of return is just 2%. The real rate of return is the actual increase in purchasing power.

You need to invest your money in assets that will grow in value over a period of time. Before diving into the different assets, let us first pause and think. Do we know what is an asset? 

Your car is not an asset.  It drops in value by 30% the moment you drive it out of the showroom and then keeps depreciating.  You also have to spend money on maintaining it.  Gold ornaments are not assets. Try selling the gold chain you bought yesterday, and you will know; you will get at least 25% less for it.  Buying a sofa for the house is not an asset.  You will probably get less than 20% of the value when you go to sell it, if you are lucky.  Since they are not assets, none of these items can be bought out of the money in the TBA; nor can the emi's on loans taken for buying them be paid out of this account.  If your regular expense account supports it, by all means go buy it.

Do stocks increase in value?  They may or they may not; but you invest in them on the expectation that they will.  It’s just that the risk of losing part of your principal is high since their prices are volatile and they don’t respect your purchase price.  Do Fixed Deposits increase in value?  You bet they do.  At a steady predictable rate without any volatility. If someone offered you an option to invest in an 8% FD vs. investing in a stock that is likely to yield 8% over the long term, what would you do?  You would obviously invest in the FD.  Since the expected rate of return is the same, you would (and should) prefer the certain cash flow to the uncertain one.  Assuming FD’s return 8%, what should your expected rate of return be, on equity stocks to compensate for the additional risk, which includes losing your capital?  You need not quantify the number; you just need to understand that volatility of return means risk; risk of losing part of your capital constitutes risk; and you need a premium over the normal return on debt to compensate for the additional risk.

What we spoke about above is the risk due to variability of return. The other and more fundamental risk is the risk of default.  Even within debt instruments, why does an unknown finance company offer more return than a co-operative bank, which yields more than an SBI deposit? The additional interest rate that you get is default premium.  Debt instruments are usually compared with SBI rates, or Government bonds, since all other instruments need to pay a premium over sovereign risk.

Higher the risk, higher the return you should expect.  In real life, the returns do not match the risks involved in direct proportion thus making certain financial decisions easier.  You should not invest in a plantation scheme since the promised rate of return may be high, but the probability of seeing your teak tree after twenty years is close to nil.  You can lend to your brother-in-law to maintain peace with your spouse; but from a risk-return perspective it is unlikely to pass muster.

Reflect on that.  If you have lent money to your brother-in-law start thinking about how to get it back.  We’ll meet again in the next issue.

Cheers!

Dinesh Gopalan
Fidelity India Finance
Bangalore
mobile: 9845257313

Part 2: Where does all the money go?

July 8, 2009

Hello All,

In the last issue we saw what could be the meaning of a "nest egg" or retirement corpus.  I hope you have had time to reflect on what your retirement number might be.  It's not an easy number; neither is it easy to answer the question "what would you do after retirement in case you had enough money to retire?". We don't realize how much we owe to our jobs - it gives us a reason to exist - at the very least, a reason to fill our days with some purpose.  Anyway, I'm sure most of us have a lot of time to figure out the answer to that one!  In the meanwhile, we continue to work, and continue to wonder where all the money went!

Talking of where the money went, do you know where yours went?  Try this small experiment.  List out what you think have been your expenses in the past three months in broad categories.  Once you get that number, compare it with how much you actually withdrew from the bank or cut out as cheques.  The difference is likely to be staggering.  The money just goes; you don't know where.  A little here, a little there, and it's gone - there's no way you can keep track of it.

Talking of investment, etc. is all fine, but first we have to understand how to put aside money.  In the absence of that, all talk of investments is just theory.

The key to solving this puzzle is to understand human psychology.  Do you miss your PF money that gets deducted every month?  Have you ever wished that you could have gone on that vacation in case the PF money had not been deducted for the last one year?  In most (as in 100%) of the cases, the answer is No.  Why is that?  That's because the money was never yours in the first place.  It got deducted at source.  So you never got used to considering that money as yours.

Your neighbor earns probably 3/4ths of the amount you do.  He stays in the same apartment complex, seems to enjoy the same lifestyle, and seems to be, on balance, as happy or unhappy as you are.  He has children and mother-in-law worries just as you do. (In case you're not married make that girlfriend/boyfriend worries).  In that case, why is it that you are not able to save 1/4th of your salary at least?  That's because, try as you might, the money just seems to get spent!

What happens when you get your annual bonus?  When you find that you have a balance of a couple of lakhs in your account?  The mind is very ingenious - it can think of a hundred different things that you absolutely need to have, but don't have.  In short, you are deprived, and you need to address the deprivation immediately.  How about that LCD TV?  If the Agarwals next door can go abroad every year, why not us?  And Kaya skin clinic has a new Botox treatment…. The list is endless.

Utilize human psychology to your advantage.  Put money aside by Paying Yourself First.

Let me explain what I mean.  List down your entire income for the year.  This includes annual inflows like bonus as well.  If you have a spouse and he/she works, list their income as well.  Now, plan what you want to (that should read as "have to") spend for the entire year.  Include all annual outflows like vacations and school fees.  Then follows a simple (A) minus (B) - and what do you get - voila, your savings for the year!  (If A – B is negative, stop reading further. I can’t help you; no one can).

How do you ensure that this planned savings actually happens?

Take your "annual spending" target above, divide it by 12: that's your monthly spending target.  Please note, we have derived a monthly spending target, and not a saving target.  Assuming you have two bank accounts (one yours; one your partner's), open a "Third Bank Account" for diverting this savings.  Every month, as soon as you get your salary, retain only what you have decided is your spending target; cut yourself a cheque for the balance.  Deposit this cheque in your Third Bank Account.  And school yourself to think of this account just as you think of your PF viz., not think of it at all!  Except to worry about how to invest it of course.

Do choose a bank which has demat account facilities and a trading desk as well - while you are at it, you might as well make it investment friendly.  Adhere to the corporate policy on this - make sure it is part of Fidelity's approved list of banks for this purpose.

Do you realize what you have just done?  You have ensured that you will start living within the means that you have set for yourself.  If you continue on your old dissolute ways, you will know by the middle of the month, when you run out of money.  You can't touch the Third Bank Account, since that is out of bounds.  As they say in Kannada you will learn to "Adjust Maadi"! 

Why did we have a spending target and not a savings target? That is to take care of the annual inflows like bonus - having a spending target will ensure that that money goes straight into the Third Bank Account.  The other beauty of this scheme is that you can now spend without guilt, since you have already taken care of the savings aspect.

As to what is to be done with the money kept aside for investment - that will be the subject of several more articles to follow.  However, like I said, all that is theoretical, if you don't "Pay Yourself First" and "Open a Third Bank Account".  Do it!  Do it now!!

And start training yourself to live with some amount of deprivation. 

Adios… till we meet again in the next issue, fifteen days from now!

Personal Finance Part 1: Retire Rich

23 June, 2009

       
Do you want to retire rich? Do you want to retire early? Would you like to be an expert at managing your money?
I know - I know - never ask dumb questions where you know the answers already! If only wishes were horses... Since I think I know your answers to these questions, let me continue.

I presume you know how to earn money - and I also presume you are earning close to what you think is your potential at this point in time in your career. You may or may not be sure of this one, but I am going to proceed on the assumption that you are; since how to earn more is outside the scope of our discussion. How to save more, and how to ensure that your savings grow, are however, very much within the scope. Questions that are seemingly simple - the answers, distinctly not so.

Welcome to the new column in the Fidelity-Newsletter-online-avatar. The column entitled "Perspectives on Personal Financial Planning" (as you might have noticed) will cover topics relating to savings, investments, investment options, types of financial risk, retirement planning, how to evaluate various financial products, how to avoid getting carried away by hype and mis-selling, concepts relating to insurance, and any other related topics that come to mind.

       
Talking of retirement:
Life spans are getting longer,
Filial bonds, not any stronger,
Medical costs, growing by the day,
Value of money, eroding away!
Job spans are getting shorter,
Ain't no pensions any longer,
Money "safely" stashed away,
Of late, is vanishing away!
A race where goalposts keep shifting,
And the track keeps meandering,
Where shall I keep my little hoard,
And grow it till the end of the road?
You have to plan for getting married, for a house, for children, for their education, for your own pension, and for touring the world - no harm building castles in the air - if and when you manage to retire. Quite apart from that, you need to live life as well. You don't want to reach your retirement and find out that you may have the money, but not the health and enthusiasm, to enjoy all that you had put off for another day! To live life, you need to spend - that's very debatable, but in this context, we'll let that stand - and to retire you need to save. Both, as you can see, are conflicting objectives.

How much money do you need in order to retire? What amount do you need in the bank in cash or investments that can be liquidated, to retire today? You can build complicated financial models that start with putting a span to your life; then think of events that may occur in that span, along with their likely dates. You assume a level of earning, and a level of spending; you assume an inflation rate, and a rate of return on your investments. All of which you project out for the next thirty years - or maybe fifty - discount it back to the present, and arrive at a number. And then take the next few days to recover.

How about a simpler approach? Think of what kind of lifestyle you would want to lead if you retire today. Then think of how much you would need in today's terms to sustain that lifestyle. Let's assume you decide you need Rupees 50,000 per month. That is Rupees six lakhs per annum. Let's assume an interest rate of 6%. You need Rupees one crore in the bank or in liquid assets to earn you six lakhs per annum. But wait a minute. You need to factor in inflation. Let's assume you will save half of your income every month; and this saving will go to add to your hoard constantly. That takes the number to Rupees two crores. What about taxes? Let's add, say, 20% to this number. We then get Rupees 2.4 crores. Remember, all such calculations are supposed to exclude your primary house, the one in which you stay; it obviously assumes that the housing loan is fully paid for.

Run your own numbers. And reflect on it. I'm sure they would be somber reflections. And think about how you would like to make the journey to that kind of financial security. This column will address some of these concerns in every issue.

Happy reflections!

Gold in the current economic context

Gold is an asset class that is worth considering for inclusion in your investment portfolio.  Since there are not too many assets (as a class) anyway, it merits serious consideration.  In the current times, for more than that one reason as well.  In any case, what are the assets that one can invest in really?

The equity story, and the state of equity in every investor's portfolio today, is too well known to bear any repetition. Highly risky with potential for higher-than-normal returns in the long run.  Of late, prone to cross-border, cross-currency money flows. And highly prone to precipitous collapses.

Debt, the perennial safe fallback option.  Since it offers safe returns, at all times a couple of percentage points above inflation, it carries a lesser yield.  A yield that is steady.  The assumption of above-inflation returns is all set to be challenged in the US debt markets at least where 10-year yields are at a record low (2.5%); inflation is currently running at 0.4%, but not even the most inveterate optimist is betting on low inflation rates in the US in the next few years. This could make the real return negative, or push up the yields, which the government is trying its level best to avoid.  The currently favoured economic stimulation theory does not favour high interest rates. Also, the assumption that debt must be safe since it offers a low and steady yield has been tested severely in the recent past - the several bankruptcies of big-name institutions, and the FMP scare come to mind.  Lower yield, it turns out, does not necessarily imply lower risk in many cases; a double whammy - you don't get enough interest and you lose your principal too! 

Real Estate, the next option.  A real option and one that you must seriously consider.  The problem is, the money involved is usually high and the liquidity or ease of sale is low.  The returns are usually very good in the long run.  If you don't time the cycle right, make that in the very long run.  In recent memory, we've had three crashes - 1994, 2000, and the current one.  Talking of the current crash, we ain't seen the end of it yet - I expect a significant drop from the current levels in the next few months.  If you are thinking of buying property, start doing your research now, but don't commit your money in a hurry.  Interest rates are not likely to rise in the near future - in fact, there may be a fall - so even loans may be easier to obtain then.  If you have invested in a house which is currently under construction, start worrying.

We shall ignore options like Art and other esoteric investments meant only for the cognoscenti in those respective fields.  There are no other investment options.  Insurance, contrary to popular perception, is not an investment.

That leaves us with Gold.  Worth writing with a capital G, as in God.  It has other connections and similarities with God as well - every deity likes to be adorned with it, it's been worshipped down the ages, people have died for it, and its price movements in future are likely to be highly volatile - just like Gods, who can be extremely temperamental and unpredictable.

Gold is something that you hold with you (even ETF's, since someone is holding it for you).  Therefore the credit risk or the default risk is zero. 

Historically, Gold has always yielded a return higher than or equal to inflation.  It is the one commodity that is guaranteed to keep its value.  The way governments across the world are running their printing presses, currencies are set to suffer  massive erosions in value.  The US government has just announced a massive program to buy troubled assets and buy back home loans (yes, the Fed is becoming the biggest housing loan issuer!) that is going to inject a trillion dollars into the economy in the form of more money, a sure recipe for inflation that will follow.  And this is just the beginning.  The Indian government is running a huge deficit of close to 10% of the GDP if you add the deficits of the Centre and the States.  Right now, the government is prevented from monetising this due to the "Fiscal Responsibility and Budget Management" (FRBM Act) - but this can't hold for long.  If they want the interest rates to come down, they have to monetise this deficit, which is another way of manufacturing money out of thin air.  Other governments around the world are facing the same problem.  In order to apply economic stimulus, they have to run the printing presses.  This is bound to lead to inflation; probably higher than what we have been used to.  A major factor that is holding inflation in check is the recent drop in economic activity and in the price of crude after reaching record highs.  Oil is currently at $53, already seeming to be on the way up.  This is not a sustainable rate.  It will rise further, especially as economic activity starts picking up; and the price of other commodities will rise along with that due to the same reason.  All this is likely to erode the value of cash or cash equivalents that you hold.  A scary prospect, since you won't even realise it as it's happeing - as more money enters the system, the value of yours goes down.

Gold has always had a negative correlation to the US dollar.  Whenever the US dollar has appreciated in value, Gold has dropped, and vice versa.  This is because Gold tends to retain its intrinsic value even as currencies fluctuate.  A currency note is nothing but embodiment of trust in the government (governments don't deserve a capital G like Gold); Gold is something that has been considered as having intrinsic worth, over time, across cultures.  A part of the attraction that we have for Gold is genetically embedded!  You can go against history, but how long can you fight what's in your DNA?

The negative correlation that Gold has with the value of the dollar has not held in the last few months.  In the recent past, as the US dollar appreciated, Gold did too.  The explanation that is offered is "flight to safety" - both Gold and the US dollar are currently being seen as safe harbors.

Gold has traditionally been considered as a "safe harbor" or "flight to safety" investment.  In times of impending war or crisis people always rush to buy Gold.  Ironically in the last few months, the same reason, "flight to safety", has been offered for flight to the US dollar.  As economies collapsed around them, people flew to invest in US Treasury Bills!  Considering that the US is at the epicentre of the current crisis, this defies rational explanation.  Anything that seems that irrational is bound to reverse soon.

The appreciation in the US dollar that we have seen in the recent past is not likely to last.  The US currency is all set to suffer a devaluation in the months to come.  As the Fed conjures more and more money out of thin air, the value of the currency will start dropping. As the government is pump-priming the economy, not all sectors are going to respond with equal alacrity.  Financial services, business services and consultancy, and real estate will be slow to respond.  They will be continue to shed jobs for some time to come.  This means jobs have to be created in the manufacturing sector.  Whatever is manufactured, needs to be exported (also, though the consumption abilities of the US population are not to be underestimated).  This requires the dollar to lose value.

The US population has now started saving. In the last few years, the savings rate was negative, as the population was being encouraged to consume more through easy money policies.  However, compared to countries like India, the savings rate is very low.  The US government has huge debt on its books.  These are dollars that it owes to others, including sovereign nations who park their money in US government bonds.  As the dollar depreciates due to reasons already noted above, there would be selling pressure on these bonds.  There will also be pressure to take the money out of the country, further depreciating the currency.

As the dollar depreciates, the price of Gold will go up.  In Indian rupees, that may be partly offset by any appreciation of the rupee against the dollar.  However, if the dollar starts depreciating steeply, the demand for Gold may pick up which may serve to increase the price further.  The "flight to safety", this time, from dollar to Gold.

The outlook for the US economy in the near future is not very good.  It looks like this recession will take some time to correct itself.  In the meanwhile, if the Indian economy starts looking up, there would be some investments flowing back to India as well.  This would push up the stock markets and also result in appreciation of the rupee.  However, I do not see this happening right away - in my view, the latest rally in the Sensex that we have witnessed is still a bear market rally - I think the market is due for one more correction.  Hence, investing in stocks is fraught with uncertainty right now.

The last few months have seen a lot of talk around Gold.  It suddenly seems to be very popular.  Prices have reached record highs and there is talk of prices going up even further.  High-net-worth individuals are rediscovering it with a passion.  Swiss banks are announcing provisions of special vaults to store peoples' gold by the ton.  ETF's have gained in popularity in the recent past; Gold ETF's, more so.  These ETF's have started buying Gold since people have started buying more and more of their units.  There has been a perceptible drop in retail demand around the world due to the rise in prices; people are preferring to recycle the existing Gold that they have.  The drop in retail demand is likely to be a temporary phenomenon.  What is of greater concern, however, is the number of ETF's and high-net-worth individuals who are joining the party.  While they are helping to drive the prices up as of now, they also tend to have a herd mentality.  If they start selling, a lot of them will sell together. This development points to Gold becoming a more volatile commodity in future, than it ever has been.  Something for the ordinary investor to be wary about.

So where does all this lead us?  Is Gold going to go up or go down?  In the near future?  In the long run?  Should one invest in Gold at current prices?

It's time Gold formed a part of every investment portfolio.  As with any other asset class, I would suggest that it should be a percentage allocation, and not an all-or-nothing bet.  Given the current uncertainty in the world, Gold is the best protection - especially against the worst possible scenarios.  Quite apart from looking at Gold as an investment, I would also look at it as a proxy for cash.  It is likely to hold its value - against any currency, as the currency depreciates, Gold will rise in price.  However, the volatility factor is new to the equation.  Due to reasons mentioned above, we are likely to see Gold prices becoming highly volatile.  As with most other investments today, you need to have a strong heart to indulge in it.  A periodic cardiac check-up is a good idea.

Equities are currently a bit uncertain - but if you are convinced it has reached bottom (let me know when you decide this point has occurred - if you are right, I will hail you as a guru) you should invest significantly in equities at that point.  Real estate currently seems to be certain.  It is certain to drop.  Whether you are invested in cash, gold, debt, or equities, it's a good idea to keep an eye on the real estate market and pick up a property (or two) when the prices hit new lows.  All this of course assumes you have the money.  If you don't, anyway you have nothing to worry!

As to what form of investment is to be preferred, I would suggest ETF's.  Gold biscuits are also a good option.  If you don't intend to hold it for a long time, don't go for biscuits, since the buy-sell spreads there are higher.  If you do buy biscuits, buy them from a jeweller, not from a bank. Banks charge higher margins, and they don't buy them back from you.  Ornaments are good for adornment; they are not such a good idea for investment.

Silver is another good option.  I am quite bullish on silver as a long-term investment.  The only problem is, there are no silver ETF's in the Indian market, and it's a very bulky commodity to store.  If you have a large hidden vault in your loft, you could consider buying it.

Happy Investing!

The Global Financial Crisis: Part 3 - A Guide to Self Preservation

(Published in DNA Navi Mumbai - 27/11/2008)

There are some inescapable ironies in the way the above drama has played out and in what is still happening out there in the markets. 

Contrary to what happens in all stories, the bad guys have not been punished.  They are being “bailed out”.  The rationale is that they are “too big to fail”.  If you are small you will be punished when the time for reckoning arrives.  If you are big, and if you have succeeded in creating a deadly contagion, and spreading it across to others in such a way that your collapse could cause the system incalculable harm, you are likely to be granted immunity.  You are also likely to be rewarded handsomely for your culpability.

There is huge systemic incentive for people who take these decisions to take a lot of risk with other people’s money.  This must stem from the fact that the people who do this make a lot of money on the upside but lose nothing on the downside.  If this were the middle ages, the perpetrators would perhaps have lost their heads, in the literal sense.  What is galling is that it is our money they are playing with.

While the system conspires to move in a particular direction, it is very difficult for an individual player (except individuals who are acting on their own behalf) managing funds to move in the opposite direction.  The herd mentality tends to prevail, magnifying events both on the upside and on the downside.

Contrary to what popular theories of diversification are based on, there seems to no true diversification among asset classes any more.  All asset classes have moved in the same direction in the recent past.  This is due to the huge inter-linkages in the financial systems.

Volatility has increased and is here to stay.  Those with weak hearts should not participate in the markets. It used to be thought that this was true for individual investors; investing money through funds would ensure peace of mind.  Unfortunately, no one in the financial system is immune from volatility.  Probably we need to train our kids for this new reality to prepare them for the real world.  I propose to start with roller coasters and then work them up to financial markets.

Commonly held notions like “debt funds are safe” are now under review.  Several debt funds who have lent to companies in the real estate and financial sectors are now facing defaults, not considering those funds which have already lost enough money “marking to market” all their CDO investments.  Money market funds across the world are in danger of “breaking the buck”, a situation where their NAV drops below the principal.

Capitalism and free markets, much touted as the best economic systems,  holy cows of the modern age, are now coming under cloud.  Unbridled free markets with minimal regulations seem to have unleashed the forces of human greed, allowing entire systems to be corrupted by market manipulators operating under the cover of perfect legality.  This is not to say that any other system is necessarily better.  Modern economic growth in the first place may not have been possible without these institutions and constructs. 

Insulating oneself from the world is not an option in this day and age.  The Indian market deluded itself for some time believing that we are “integrated” with the rest of the world when it comes to taking advantage of global business growth, but are “decoupled” when it comes to stock markets.  In the last few months, the co-relation between the Dow and the Sensex, as well as the Sensex with other world stock indices has been so high as to lay permanently to rest the myth of decoupling.  The exchange rate movements that we see now are also a result of cross-border cash flows reacting to global events.

How do the decision makers, the politicians and central bankers of the world, plan to address this?  With more regulation, naturally.  There is a clamor for regulations to be tightened.  How, in what fashion, and to guard against whom, does not seem to be very clear.  I have no doubt the system will arrive at a list of culprits and causes by consensus, and move to take certain steps to contain “such” excesses in future.  The only problem being that any excesses in future will be of a different nature.  The system will soon enough find a way to work around the regulations; it will possibly use them to advantage.  The current round of liquidity being infused into the markets is just the beginning for such a cycle to start again.  We can be sure there will be another set of scams a few years from now; that a few hundred individuals will benefit hugely; and a few million lay people will again have to bear the consequences. 

What can the individual investor, i.e., you or I do to safeguard our money given the above somber conclusions?  It is impossible to predict how the markets will move over the short term, and how economic indicators like inflation, interest rates, or exchange rates will behave over any defined span of time.  What we can attempt to do is to draw some general conclusions from what has been happening in the markets, and keep tabs on certain trends that are likely to emerge in the near future.  We can draw up a plan of action based on this; and keep checking our assumptions and correcting our strategy and direction from time to time.  It is no doubt going to be painful process, one where we will have to correct our course as we go along.

Some of the fundamental truths of investing still hold good.  You need to invest regularly and for the long term.  You need to diversify over different asset classes by using asset allocation strategies.  You need to understand the risk, return and liquidity profile of every asset class that you are investing in.  You can hand over your money to someone else to manage it for you, but you need to be knowledgeable enough to know where and how your money is being deployed. 

We need to add some more fundamentals in light of recent happenings.  You need to be reasonably aware of economic cycles and how to take advantage of the ups and downs.  The recent meltdown may have been too severe for most people to have taken timely corrective action; however, it is likely that not all future swings will be this dramatic, and with enough vigilance you might be able to act in time to avoid potentially nasty situations.  You need to be aware of global economic trends at least in a broad general sense; it may not be prudent to be completely oblivious of what is happening in the rest of the world.

As to some concrete steps for the immediate future, you could consider the following.  Equity markets are at  artificially low levels right now, more so in India.  You should start entering the market by buying in small lots.  The index is likely to swing wildly for the next few months – my guess is between 8000 and 11000 levels.  While the prices are at such low levels, it would be a good strategy to invest.  However, you should only commit funds that you don’t need for the next three to five years.  While the market will surely rise, we can’t really say when.  If I were to take a guess, I would say that we will see the year 2009 end at 13000 levels, and 2010 to end at 16000-17000 levels of the Sensex.  If the markets reach those levels in a sudden spurt over a very short time period, you could even consider selling at that point if you expect a correction to happen.

For those of you who invest in equities via the mutual funds route, invest in large diversified funds or index funds.  Avoid midcap funds for now.  For those of you who like to invest directly in the market, do not jump into real estate, financial services, or commodity stocks for a while.  Pharma and FMCG are good options currently.  IT and IT Services are a bit more difficult to predict due to factors that are both positive and negative – watch the sector closely and try to take a call at the right time.  Avoid hotels, travel and entertainment.  The global economic slowdown is not likely to reverse direction at least till mid-2009 at the earliest.  Tight liquidity conditions and shrinking debt markets are likely to persist for some time. The Indian elections are likely in early 2009, which would paralyze fresh policy initiatives and spending till the new government is up and running in mid-2009. All these factors point to this strategy likely to being effective for the next six months at least.

Some part of your portfolio always needs to be in cash.  The best option for cash is to open Fixed Deposits with large banks.  The interest rates are currently  around 10% for FD’s of one to three years’ duration; it might make sense to lock in at these rates since the rates are expected to drop in 2009.

If you are willing to take some amount of risk with your debt investments, you could look at investing in long-term gilt funds.  You could benefit from the increase in NAV when interest rates drop.

Invest in real estate.  That is something that will always stand the test of time.  However, currently real estate prices are expected to drop further.  You should wait for a few months; it is expected that there will be major drop in real estate prices by the first quarter of 2009.

Invest at least 10% of your total investible surplus in gold.  This is a strategy you could adopt for the long term.  When it comes to gold, only ETF’s and gold biscuits (or coins) qualify as investments; ornaments do not.

Keep re-evaluating your strategies in light of developments.  If you think you have to exit any investments, do not hesitate to book losses.  Do not indulge in derivatives of any kind.  Commodities (except gold and silver) are also avoidable.

Remember that it is not possible to make money unless you take risks.  For an opportunistic investor every downturn presents an opportunity; currently, the opportunity is big.

Happy Investing!