Personal investment – How much is too much?

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Is there a proven strategy for personal investments? How can I use it for my personal investments? How do I align all my future goals and formulate a simple investment strategy? How much should I invest and where?... if these are questions bothering you, read on. The article starts with a data illustrated introduction to how a planned, steady investment strategy can take you towards financial goals. One can use the this calculator to meticulously plan investments by following this strategy. If you are looking for advice to make quick money, this article is not for you. This write-up is based on data and not on opinion or personal philosophy. At end of this article, you will be able to formulate a personal investment strategy and arrive at how much investment is required. Read on if interested…

Investment strategy – is there learning from historical market data?
Index levels should not be a real determinant of an investing decision. Here is the reason. Let’s say Mr.X started investing in 1991. If X managed the feat of investing at the lowest level every year since 1991, annual returns would have been 15.88% CAGR as of June 1, 2009 at 13500+ levels. On the other hand, if X invested at the highest level every year, returns would have been 11.78% CAGR. Now, if X had invested on a fixed date every year, let’s say, January 1, then returns would have been a surprisingly 15.77%. The difference between a fixed date and the lowest date is just 0.11% p.a!

Since 1991, the CAGR as on March 9, 2009, for annual investments made at the highest Sensex levels was 8.21%, while it was 12.18% when the investments were made at the lowest levels. For investments made on January 1 every year, it was 12.08%. Now pause for a moment to think. Does the paltry difference in returns between the lowest levels and regular investments really matter to you? The key learning is that one must not worry too much about index levels being high or low. Invest in a systematic manner on a periodic basis. Investing one-time big money when market is low could be fraught with risks. In fact, returns in monthly investments on a fixed date are almost similar to the ones given by one-time investments done at the lowest level every year!

There is further substantiation by data – Even after several scams, crashes and fluctuations in FII investments that the Indian markets have witnessed in the past 30 years, the market has delivered 16.91% p.a. (at 18000 Sensex levels)! It’s not important to see green on your investments every day, week, month and even a year. It’s about long term planning to give your investments time to mature and grow. Sensex has multiplied six times every 10 years at 19% CAGR and if the same continues, then in 2018, the Sensex will be at 129600 points.

A suitable periodicity for salaried individuals is to invest every month (If you are a businessman, you can decide suitable frequency). Having arrived at this investment strategy, there are only 2 other main questions:
1. Where do I put my money?
2. How much should I invest every month?

Where do I put my money?
Market investments can give good returns with less-risk only if it stays invested over long term. In general consensus, definition of long term is period more than 5 years; the longer the better. Popular long-term investment options are bank FD, NSC, PPF, stocks and mutual funds. Investment in debt based schemes gives returns ~8%p.a. Returns from equity schemes vary significantly depending on risk profile of financial instrument. Depending upon risk–taking ability, one can choose combination of different investment vehicles (debt or equity). Considering that sensex index has given 19%p.a CAGR returns for past 20 years, it is safe to assume a more moderate number of 12%p.a returns on your investments for next 25 years (By smart investing, one can easily beat market by long way). This is assuming that Indian markets have lot more potential to develop in next 25 years where domestic demands increases, local consumption increases, goods gets developed locally and self sufficiency leads to organic development of GDP. In general, this is going by India shining story of BJP. Parking aside question of where exactly to invest, assuming 12%p.a CAGR aggregate returns on investments in long term is conservative assumption. The calculator assumes 12%p.a CAGR returns based on this reasoning. If you want to understand various investment vehicles where you can invest to get 12%p.a returns over long term, call a personal investment advisor. This involves deep market study and personal judgment which is beyond scope of this article.

How much to invest?
It is important to assume an annual rate of return rather than choice of your investment vehicle. For this reason, the calculator does not depend on choice of your investment vehicle.

There are 2 popular schools when you start planning for future:
1. Don’t plan much for future – cant predict what is in store 
2. Plan for all future possibilities.

A mid-path strategy is to plan for most likely events so that one is prepared to face likely eventualities. Our previous generations invested whatever they could save from their earnings. There was tendency to squeeze domestic spending and save rest in bank FD/post office/the likes. There was really not much need for detailed planning (there was not much scope since income levels were limited). Contrast to today’s earning levels, when salaries have risen well above previous generations; there is often lesser need to squeeze on domestic spending. Rather a well planned, systematic investment regime in long term can give corpus required for future needs. If future needs are well planned, one can enjoy excess without guilt of splurging on luxuries.

A balance between spending and saving is possible through planning. Here is how: (refer to this calculator alongside).
1. List down all your future financial goals.
2. For every financial goal, write down the year when it needs to be realized and corpus required in today’s money value.

E.g. Mr. X wants to build a house in next 20 years. The value of a similar house today is Rs.50 lakhs. The same house will cost X significantly higher money 20 years later due to general inflation or steep inflation specifically in real estate segment. To make matters simple, put aside inflation worries and write down its current value of Rs.50 lakhs.

For simplicity, the calculator assumes 9% inflation (safe to assume this number given history of growth of Indian economy over past 25 years). One could change this value if there is a good reason; the calculator allows you to change this number.

3. The calculator calculates future value of this money after so many years (20 years from the above example). Assuming that you invest monthly, the calculator calculates value of money which you need invest per month.

The calculator assumes a safe 12% p.a CAGR returns on investments. If you want to change this value based on your risk preference, feel free to change and see how other values change. It is an important input to the calculator and depends fully on your risk preference.

4. To make matter simpler, calculator sums up monthly investments required from all financial goals. One can understand what amount of money needs to be invested totally per month.

Once this plan is made comprehensively for all future financial goals, one can understand where he stands today. There can be 2 possibilities:
1. Current income and expenditure do not permit luxury of planned investment - It is a signal to tone down on needs/expenses. It will force you to prioritize financial goals. You could also think of alternate sources of income to supplement investment need.
2. You have surplus income than investment needs – It is a signal that you can afford daily luxuries more than today. You could also think of early retirement.

In either of the 2 cases, one can fully understand implications of savings, expenditure and make prudent personal decisions for future. A lot of financial institutions offer this as comprehensive financial planning package. With bit of time and application of mind, one can do this all by oneself without fear of being influenced. One might need expert advice to decide on investment vehicles but no longer on planning procedure itself.

Click here to open the calculator.