BRIC - out, CEEMEA - in? Change of guard in emerging markets...

I was happy with my Emerging Markets index fund thinking it had me covered across all emerging markets - well not really :-)

The "traditional" concept of emerging markets being primarily the BRIC countries (Brazil, India,China) has now taken another turn. Probably because these countries have started looking a little frothy with billions of dollars of foreign investment in the last 5 years or so. They've got to take a breather sometime - right?

Well, now you dont need to restrict yourself to only the traditional emerging markets. The new (well atleast for me) buzz around is CEEMEA - meaning Easter Europe, Middle East and Africa.

If you want to be early to the party of the next decade (who knows - it might be), consider investing in these countries. Of course it is a given that these are highly risky investments (ever been to Nigeria?), but with great upside potential as well.

Wanna roll the dice on this with some play money?

Check out TRowe Price's new Middle East Africa fund - TRAMX. It opened up in September this year and it has already returned over 11% (in a month!). Of course it may go the other way next month and correct by as much as 50%, but we're talking a small portion of one's assets here - not one's retirement savings.

This fund stays out of the murkier areas in Africa - has quite a few holdings in South Africa and taps into countries like Bahrain, Qatar, Oman etc. The expense ratio is quite reasonable given the exotic fare in which the fund invests.

Another plus I believe is that since this fund is brand new, it does not suffer from asset bloat and the manager has a lot of freedom to really "light it up" :-)

I'm thinking of giving it a shot.......

Ken Heebner - Poor Man's hedge fund manager?

Name a US Large Cap blend fund that has returned 75% YTD? Yes you heard me right - 75% - its beaten (well beaten is not the right word, thrashed is more like it) the S&P 500 by a whopping 63%. And if you look at its returns in the past - well judge for yourself:

CGMFX - CGM Focus Fund

2003 66.5% (beat the S&P by 37.8%)
2004 12.3% (beat the S&P by 1.5%)
2005 25.4% (beat the S&P by 20.5%)
2006 15.0% (pretty much the same as the S&P 500)
2007 73.3% (beat the S&P by 63.5%)

2004 and 2006 would be considered bad years for Heebner, but for an average fund manager, they would be considered pretty decent :-)

And he's got other funds that have stellar performances as well. Check out the CGM realty fund (CGMRX) - its up 30% YTD while other real estate funds are in the red for the year.

Now, whether he keeps up this performance up in the long run remains to be seen, but he's been doing great lately, we'll have to give him that.

Personally, I've got my eye on the CGMRX as I do not have any RE fund in my Asset Allocation plan (apart from what the total stock market index holds) and I'm looking to add some RE exposure but am wondering if I'm already late to the Heebner party.

So how does Heebner do it? Dont know - maybe he just has a knack for spotting whats "in". The 330% annual turnover (meaning he does tonnes of buying and selling in a short span) seems to suggest so.

So, if you are on the lookout for a poor man's "hedge" fund and dont have the millions to invest in a "real" hedge fund, check out the Capital Group.

Better armour up for the bumpy ride tho......

East is East and West is West and the twain SHALL meet!

Indexing and Active Management are two very different investing strategies. With Indexing, an investor relies on the performance of the broad market indices for his returns. With Active Management, he believes that the stock picking ability of his fund manager will beat the returns of the market indices.

Battle lines have been clearly drawn between the two strategies since time immemorial. Bogleheads and Vanguard Diehards will always claim that over the long run, indexing beats active management and others that dont believe in indexing will claim its the other way around.

So who is right and which one should I pick? I look at it this way - well both are right. It is a fact that indexing (specially when it comes to efficient markets like the US) beats active management 70% of the time over the long run. BUT, if I pick the right funds with stud fund managers, I could be in the 30% that beats the index as well.

So why not do a little of both?

Pick index funds for your US allocation since the US is a highly efficient market and it is indeed hard for fund managers to beat the indexes over the long run (70% of them fail to do so). And by long run I mean over 10 years.

For your international allocation, go with actively managed funds since the foreign markets are not as efficient and fund managers have a better chance of beating the indexes (by finding inefficiencies) over the long run.

I personally have my core portfolio in index funds. But I do have some international and mid/small cap funds that are actively managed.

What's on your Christmas list this year?

Well, if I were to overweight a couple of sectors in my long term portfolio going forward, I would vote for buying into Emerging markets and Energy.

Sounds like performance chasing doesnt it? Might be. Emerging Markets and Energy have been on a tear lately - check out the best performing funds over the last couple of years - you'll see most of them fall into 2 categories - emerging markets and Energy :-).

So why am I putting my money (atleast some of it) on these two in particular?

It looks like over the past few years, the rest of the world is catching up with the US and other developed countries. We are in the process of seeing the often mentioned "Global Economy" really take shape.

In this new global economy, everybody's got a shot. Its not only the big boys that can have all the fun (read the US and other developed nations). Latin America, India, China, Eastern Europe and even Africa have joined in the party and are showing real signs of development and progress ("Real" companies making "real" profits).

IMO, over the long run, Emerging markets have a lot more room to grow and when the next opportunity presents itself, I will be adding to my EM holdings.

As far as oil goes - the falling dollar, a Republican government in the White House (at least until the next election), geopolitical tension in the middle east thats here to stay, increasing global demand, are some of the reasons oil prices will continue their upward trend over the long term.

So the next time oil prices dive a bit, I'm going to get me an energy fund :-)

Ofcourse, these "recommendations" come with the standard disclaimer - be ready for a lot of short term volatility and do not put all your investable assets into oil and emerging markets :-) These should make up only a small part of your portfolio (in my case, not more than 20 percent)

The funds in these categories that I like are

EM

VEIEX - Vanguard Emerging Markets Index (already own this one - will be adding more to it). Its low cost, diversified across the globe and has a great record (more details at Morningstar)

Energy, I am leaning towards

FSENX - Fidelity Select Energy (I dont own it yet but probably will on the next "correction" in oil prices)

Hey, for what its worth - the next time you see gas prices rise at the pump, you can find solace in the fact that at least your energy fund is doing well :-)

Have you gotten your XRAY done yet?

Nope - not talking about the much dreaded doctor's visit that you've been dodging :-)

Morningstar has a great tool (free and you don't even need to register) that gives you a complete breakdown of your portfolio - just feed in the ticker symbols and dollar amounts.

It tells you (among other things)

1) Your overall stock, bond, cash allocation
2) Which countries your stocks are invested in
3) Break up of which sectors your stock allocation is invested in
4) Interest Rate sensitivity of your bond holdings
5) Whether you are large cap, mid cap or small cap weighted
6) Whether your portfolio leans towards value or growth

Pretty cool. Check it out here

I always use the XRay when I need to re-balance my portfolio (to get before and after snapshots) and can say that I've prevented a few broken bones in the process :-)

Commodities anyone?

What asset class does the following?

1) Gives you diversification over and above cash, stocks and bonds
2) Benefits from the falling dollar
3) Benefits from increasing infaltion and rising prices

well you guessed it - commodities. With the dollar on its way down, prices on their way up and global demand for commodities spurred on by red hot growth stories in the emerging markets, desh included, does it make sense to add a touch of commodities to your long term portfolio?

Take a look at the long term returns of the Dow Jones commodity index (^DJC) as compared to the Dow Jones Industrial Index (US stock - ^DJI) and the Vanguard short term bond index (VFSTX). Click on image below to enlarge



Looks like the overall performance of the commodity index falls somewhere in between (that of stocks and bonds). Also, if you look at this chart across shorter timeframes, you can see that commodities have their own cycles of ups and downs and are loosely corelated with the stock and bond cycles, which gives you good diversification.

There are quite a few ETFs and ETNs that track various commodity indices

1) GSG - iShares S&P GSCI Commodity-Indexed
2) DBC - PowerShares DB Commodity Idx Trking Fund
3) DJP - iPath Dow Jones-AIG Commodity Idx TR ETN
4) GSP - iPath S&P GSCI Total Return Index ETN

I'm leaning towards DJP. Its well diversified across all commodities - precious metals, energy, agriculture products you name it and is also tax efficient. Haven't pulled the trigger yet tho.

Comments are always welcome.

A little gambling with play money? Sure!

Once a bulk of your assets have been allocated into a broadly diversified portfolio to suit your financial goals and you are on cruise control - well things can get a little boring. Long term investing if done right SHOULD be boring.

However, IMHO it doesn't hurt to set up a small "play money" portfolio (about 5% of overall asset base) just to keep things interesting. With this play money - you could trade stocks, options, derivatives, heck even buy into Cramer's tips all you want.

I would be lying if I said I didn't get a rush from watching a penny stock that I just bought triple in a couple of days. So go ahead - make a killing on penny stocks and the likes. Trade 'em, short 'em, ride 'em up the hill and speculate to your heart's content.

Just remember to do so with only your play money (money that you can afford to lose completely) and don't get carried away and big headed when you double your money in a couple days. It was probably just luck :-)

Its like eating healthy on weekdays and pigging out on the weekends - gotta have the double cheese burger and curly fries once in a while!

Happy trading.....and if you've got any "hot" picks, leave a comment. I'll check them out too.

In life, two things are certain.......

Death and Taxes.

I'll leave the discussion on death for another post and talk a little bit about taxes and how to bake in tax efficiency into your portfolio

The bottom line is that taxes can eat away a big chunk of your investment returns over the long term (more so if you happen to be in a high tax bracket). Keeping the following in mind when creating a portfolio can soften the blow....

For investments held in the US -

# Hold your Bond allocation inside of a tax deferred account like a 401K or IRA. This is because dividends accrued from bond funds are taxed at your highest marginal rate (treated as ordinary income).
# Along the same lines, if you hold small cap funds or value funds or REITS (real estate funds) that dish out large capital gains distributions every year - hold them in a tax deferred account for the same reason as 1 above
# If you have taxable accounts (non-IRA or 401K or ROTH), hold your large cap/index funds (tax efficient) in there.
# Evaluate whether investing your cash/bond allocation in Tax exempt Municipal bond funds or Tax exempt Money market funds is advisable (based on your tax bracket). It makes sense to invest in a tax exempt instrument if
(tax exempt return)/(1 - marginal tax rate/100) > regular taxable return
So if your marginal tax rate is 35% then a tax exempt muni yielding 3% gives you a better after tax rate that a 4% Fixed deposit since by using the formula above, the REAL return after taxes is equivalent to that of a CD yielding 4.6%. On the other hand, if you find a CD yeilding greater than 4.6% - go for that instead of the 3% muni.
# When rebalancing your long term portfolio (which involves selling/buying), try to do so inside a 401K or rebalance with fresh money (buying only - no selling). This way, no taxes will need to be paid just because you are rebalancing your portfolio.

I'll talk thru tax saving techniques in the Indian Market in a later post.

The changing face of credit in India

When I was growing up in India, I remember the norm to be - if you don't have the cash to buy it - do without it. Only a very few folk were comfortable taking on home/car or any loans for that matter - personal loans were unheard of. In fact, when I first applied for a credit card back in 1996, Citibank rejected my application thinking I'd run away to the US with their money (being a software "professional" and all)

I'd say we've come a long way, haven't we - when everyone in India knows what EMI stands for (10 years ago I would have thought it had something to do with Electrical Maintenance) and credit card companies now run after you to open up an account - and not the other way around.

Car loans, personal loans, home loans - you name it - the Indian consumer has relatively easy access to all of them. People are buying bigger cars, bigger houses and the younger generation doesnt believe in wearing any clothes other than the ones that have GAP, Adidas, Aeropostale, Nike and the likes printed on them - well they cost a lot of money too. And the less said about cell-phones, the better. Heck, even the paanwala dude at the local crossing flips out his high end Nokia to say hi to his buddy across the street.

All this sound familiar? Big house, big car, shopping at the Mall, eating out, carrying the latest gizmo's - sounds like the average American consumer - doesnt it?

Interest rates have been rising in India for years now and it is hurting the folks that have bought too much house - they are now seeing their EMIs skyrocket. Were banks diligent enough to check the financial stability of their loan applicants or did they dish out loans to any and everyone (read sub-prime)?

See some similarity again - sound like the US?

What if in the coming months/years, the number of defaults spike (despite the banks resolving to sending goons to collect payments)? Is the booming Real estate industry at risk (like it is in the US)? I believe the next couple of years are key for the real estate markets in India. IMO there is too much speculation in the Indian RE market with people buying multiple homes for investment (like the "condo flipping" that went on in Florida not so long ago).

So, the question is - is India headed for a credit crunch as well? Well - my crystal ball is a little foggy, only time will tell........for now, lets celebrate.......the Sensex broke the 18,000 barrier earlier today :-)

I should probably keep my thoughts on an impending correction for later maybe.....

Dodge and Cox Fund family - 4 funds, all 5 stars

Dodge and Cox is one of the few fund houses that believes in running only a small number of funds (in this case a grand total of 4), but making sure that each one is a long term winner.

Currently the 4 funds are "group managed" and EACH one has a 5 start Morningstar rating. Check out these funds at Morningstar - stellar record - lower than average expenses and very reliable management.

The tickers are:

DODGX - Dodge and Cox Stock fund
DODBX - Dodge and Cox Balanced Fund
DODIX - Dodge and Cox Income fund
DODFX - Dodge and Cox Foreign Fund

2 of these funds (DODGX and DODBX) are already closed to new investors due to asset bloat (but still available thru 401K plans that offer them).

I have been personally invested in DODFX for the last 4 years or so. Great long term record, but it has trailed the foreign indices by a small bit this year (maybe due of asset bloat or because it has a value twist) - no complaints tho - I'm sure it'll return to its good old ways of consistently beating the indices soon.

If you're on the lookout for a diversified International Stock fund, hurry before they close DODFX too!

Pardon my french, but being a cheap ass helps

Although I tend to regularly splurge on my not so cheap "hobbies" - when it comes to investing, I admit I am the biggest cheap ass around. I simply hate paying for things that don't need paying for (on the other hand I'd gladly be willing to shell out a couple of hundred bucks or more to play a round at Pebble Beach :-)). That's just me.

In the investing world, here are some "unnecessary" costs to watch out for

1) Wire transfer fees, check ordering fees, minimum balance fees - these fees can kill you and for no reason. Set up your banking accounts in a way so as to eliminate these fees. Digital Credit Union has worked great for me in the past 10 years. No minimum fees, transfer fees, free check ordering with direct pay - so on and so forth. If I do really need to wire money, they have low rates. Online banks like Emigrantdirect or Money Market accounts like Vanguard Prime work good too.

2) Trading costs and account maintenance fees - have you compared rates for your brokerage costs? If you buy Mutual funds using a brokerage - a lot of times they will ding you with a fee (and pretty sizable at that). And this gets worse if you are investing a small amount every month (DCA). You can avoid these fees if you invest directly with the Mutual fund companies. Also, watch out for the account maintenance fees that mutual fund companies charge. For example, Vanguard charges a $15 fee for any fund that has a balance of less than $10K. But there is a way around it - sign up for e-statements and they waive the fee.

3) Mutual fund Expense Ratios and loads - These are real killers over the long term. Stay away from high ER and load funds. You can do the math or visit Morningstar to research how high ER/load funds eat into your long term returns - its staggering. Pick no load/low ER funds as much as possible.

So lets raise our glasses to more folks joining the "cheapass club"!

Non Resident Indians and the falling dollar

Non Resident Indians (NRIs) that have plans of retuning to India are obviously concerned about the falling dollar. Just this year, the dollar has fallen by more than 13% (as compared to the rupee) and is still falling.

One has to now contend with India's rising inflation AND the depreciating dollar - that's a double whammy and cause for much concern.

I don't buy the official Govt inflation numbers (neither the US govt, not the Indian Govt). Frankly speaking I don't know how they come up with numbers that are so grossly inaccurate. Govt of India puts inflation at 4.5% (or thereabouts) - that's not even CLOSE to the real number.
And the same goes for the US inflation numbers (under 4%) - have you checked the price of gas and milk lately? Have you renewed your apartment lease yet? Oh I forgot - they don't consider these aspects when coming up with the inflation number - well what do they consider? - sorry for digressing, maybe I should leave this for another post.

OK so coming back to the NRI situation. Interest rates in India are close to 9% for Fixed deposits (10% for senior citizens) - mainly to keep up with rising inflation (which is officially at 4.5% - ha!). Interest rates in the US are around 5% and dropping.

Lets say you are an NRI and have an asset allocation plan that is 60% diversified stock and 40% fixed income (all held in dollars) and you plan on retiring in India. In this portfolio, the cause for most concern would be the 40% (fixed income that is earning 4%-5% in the US). If this is held in dollars, it is going to be tough to keep up with inflation in India (which is a lot higher) and one of the most important goals of fixed income is to AT LEAST keep up with inflation.

So how should you tweak your overall portfolio if you plan on retiring in India?

• Hold your long-term fixed income allocation in rupees in India. That way it will keep up with inflation in India. You can diversify across bank fixed deposits and debt mutual funds
• Also hold the India part of your stock allocation in rupees in India
• Hold the rest of your diversified stock allocation in dollars in US mutual funds

This way, the fixed income portion of your portfolio will fulfill its goal of AT LEAST keeping up with inflation in India. Also, you will still hold a widely diversified stock portfolio (by keeping that in dollars in the US) which you would not be able to do if you moved everything to India. India does not have any "international" equity funds that invest outside of India and you will lose the diversification of your stock portfolio if you pull out everything from the US and invest in India. And you never know, the dollar may come back in the next 10 years - then what?

So to summarize - move your fixed income allocation and India stock allocation to India. Hold the rest (diversified stock) in US Mutual funds. And don't forget to pay taxes to Uncle Sam for the interest that you make from your fixed income allocation in India.

Due credit for this idea should go to some folks over at the R2I Finance forum (link on right nav)

Related posts

Post1 - Rupee and dollar
Post2 - Investing in India - different strategy

Ready to retire? Or trying to figure out when you can?

The pager's been beeping like crazy all night and despite all your hard work you're behind on your projects and your bosses have been giving you a hard time of late - you get up one morning and think to yourself - wouldn't it be nice if I could call it quits today - well can you? How do you decide if or when you can hang it up comfortably?

There are a few ways to do this (some involve running spreadsheets and number crunching)

A relatively simple "back of the envelope" calculation involves the SWR - safe withdrawal rate. It is the rate at which you can "safely" withdraw funds from your existing asset base and meet your inflation adjusted living expenses (without the risk of your assets running out).

A commonly accepted SWR is 4%. A more conservative SWR is 3%.

So lets calculate how much one needs to retire using the following assumptions:

Yearly expenses = E
SWR = 4
Asset base required today = E * (100/SWR) = E*25

So, if you stop earning today and want to live off your investments (assumed to be a broadly diversified portfolio that contains 70:30 stock bond allocation) to support a lifestyle with yearly expenses of $12,000, you would need an asset base (invested assets in today's money) of $12000*(100/4) = $300,000

If you take a more conservative SWR of 3%, your asset base required would be $12000*(100/3) = $400,000

Ouch! Considering my yearly expenses, I think I'd better get back to work......

Some mutual funds in India that I like

When I first started researching mutual funds in India, I found it to be quite overwhelming. There were so many categories of funds and each had a growth and dividend option just to make things more confusing. There were some "new" categories like FMP (Fixed maturity plans), MIP (Monthly income plans), Principal guarantee funds (like thats ever possible if your fund has any kind of equity exposure :-)), ULIPs etc etc. When the dust settled from my research, I thought that I could possibly set up a decent portfolio with 4 or 5 funds (one index fund, one debt fund, one mid-cap fund and one diversified equity large cap fund)

For the index fund category, I like the UTI Master index - its one of the oldest index funds and has a solid record for over 5 years. It has a lower than average expense ratio in its category and no front end load (as is with most index funds).

In the debt fund category, I went with the HDFC Floating rate fund ST, mainly because of its low expenses and low sensitivity to interest rate fluctuations.

In the diversified large cap category, the 2 funds I like HDFC Top 200 and Reliance Growth

In the mid-cap category, the Sundaram Mid cap fund stands out IMO

If you are looking for a balanced fund, then take a look at the HDFC Prudence fund. It has a stellar record going back 10 years. I have never heard anyone say or write one negative thing about this fund - its a winner and cuts down on volatility since it holds about 20% of its portfolio in bonds

I think one can stay away from the FMP's, ULIPs, MIPs, ultra short/liquid and long term debt funds, principal guarantee funds, sector funds and fund of funds etc - stick to "bread and butter" funds and still create a well diversified portfolio that will do well over the long term.

P.S - I wouldnt touch a ULIP scheme with a 10 foot pole!

Assessing your risk profile and rebalancing to it

One of the first steps to building an Asset Allocation Plan is to assess your risk tolerance. What kind of an investor are you? How much of a loss in your portfolio can you live with without spending sleepless nights? Do you have the "courage" to throw more money into the market during a downturn or will you sell in panic?

Be brutally honest with yourself and one certain way to test this is to live thru a downturn (we have had a few in the last 7 years, including the dot com bust in 2000). Think carefully about how it affected you - what was your reaction, what thoughts crossed your mind, did you reach your breaking point, did you break, did you sell in panic, did you buy like Braveheart?

If you can accurately guage your risk profile (believe me, its not easy) you can come up with a very important aspect of your asset allocation plan - the split between your equity holdings and fixed income, or in other words, your stock to bond ratio. This will form the basis of your financial plan and once you decide on it - stick to it no matter what.

For example, I like Larry Swedroe's (author and regular poster at the Vanguard Diehards forum at Morningstar) rule of thumb to determine stock bond allocation. Take your maximum acceptable loss percentage, multiply that by 2 and that should be your stock allocation. Meaning, if the maximum loss you can digest without panicking is 30%, then multiply by 2 = 60%. You should not hold more than 60% of your entire portfolio in equities.

Another rule of thumb is - invest your age in bonds and (100-age) in equities. If you are 35 years old, then hold 35% in fixed income and 65% in equities and adjust that as you get older.

Whatever be the allocation you choose, it is important to adhere to it - that is the only way you can be successful over the long term. And this leads us to the concept of rebalancing.

Lets say you came up with an allocation plan of 65% stock: 35% bonds based on your risk profile and are fully invested as such on Jan 1 2007. In Dec 2007, you look at your portfolio and you see that because of the continuing bull market in equities, your equity % of your total portfolio is now 70% and bonds make up only 30% of your portfolio. This would be a good time to rebalance - meaning make changes so as to bring your allocation BACK to 65% Stock : 35% bonds.

Now - how often should one rebalance, and how should one go about doing it

• My suggestion is to rebalance once a year or if your allocation is out of whack by greater than 5% - whichever comes first
• Rebalancing can be done with new money or old money. If you want to increase your bond allocation by 5% to bring your allocation back to a 65:35 split, add to your bond funds (buy 5% worth) with new money (salary savings etc). To use old money, sell 5% of your equity holdings and add that to your bond funds
• When rebalancing with old money, try to do the re-balancing inside of a 401k or IRA, so when you sell the equity it is not a taxable event, making your rebalance tax efficient

The act of rebalancing is an automatic way to "book profits" - now you dont need to ask - when should I take some off the table or is this a buying opportunity. If your overall stock allocation increases by more than 5% sell stock and buy bonds. If its the other way around, sell bonds and buy stock. If you allocation numbers have not changed significantly, do nothing. The selling/buying calls can be made based on your allocation numbers at any given time. Its a thing of beauty - cruise control baby!

Investing in India - different strategy?

When I compare the Indian market and the investment instruments available there (Mutual funds in particular) with the US market and its available funds, I see the following, that could have a bearing on what kind of an Investment strategy might work in India.

• As compared to the US market, the Indian market is quite "inefficient", meaning that it is not as hard to beat the overall market indices in perfomance. This is proved by the fact that a majority of actively managed funds consistently beat the index. The reverse is true in the US. So in my opinion, true indexing has not (yet) come of age in India, but will in the future as the markets get more efficient.
• Average Mutal Fund expenses in India are quite high (in the 2% - 2.5% range for equity funds). In addition to the high expenses, most equity funds charge a 2% - 2.5% front end load which makes the overall expenses bordering on absurd. The Indian markets have not seen a significant down year in the last 4 years or so and that is why not many people are concerned about these loads and expenses....reason being that if your fund is making 60% in the year, whats 5% in expenses in loads. But if your fund has a negative return year....hmmm the fees and loads hurt a lot more.
• From a tax perspective, investing in India is a dream. Long term Capital gains tax (if you hold for 1 year or more) for equity oriented funds is zero - zilch - nada and LTCG on debt funds are 10%. These make for HUGE advantages (as compared to US taxation) when it comes to tax savings.
• Debt Mutual Funds are not as popular in India. Due to the extended bull market in equities and a rising interest rate environment, debt instruments have taken a back seat. Also, they dont enjoy the favourable tax treatment like equity funds. Lets wait for the first signs of an extended bear market and things may change in favour of debt instruments.
• A lot of people in India still believe that Whole Life Insurance policies (ULIP schemes) are the solution to their long term financial troubles. As a result (unfortunately), these horribly expensive and mediocre perfoming schemes are still very popular.
• As far as overall volatility is concerned - India, an emerging market is a whole lot more volatile than the US markets. In my portfolio, I have seen swings of 30% in a matter of months.
• A big drawback in the Indian markets is the lack of any decent international funds. So the average indian investor cannot diversify outside of India. It is high time the Indian Fund houses stop dishing out 5 versions of what is essentially the same fund and concentrate on opening up some new international funds to their investors. I read an article recently that this is indeed in progress - hopefully they will come out with something soon.

Given all of the above, what could be a good investment strategy in India? IMHO

1. Pick funds with lower than average expenses and loads in their respective category
2. Invest via the SIP route (Systematic Investment plan). This will help protect your investments against the perils of a volatile market. Also, most funds cut down on the FE load if you invest via SIP
3. Diversify across fund houses (managers)
4. Do a mix and match of index funds and actively managed funds. Since India is not yet an "efficient" market, pure indexing may not work as well as active management
5. Stay away from sector funds and NFO (new fund offerings)
6. Learn to accept volatility and invest only for the long term (and by long term I mean more that 3 - 5 years). I heard some "expert" on TV the other day saying that that "long" term means 6 months or more :-)

Fund picks coming up next........

Less is more.....

A long term investment strategy can be unbelievably simple. After all - there are better things to do with your time than babysitting your portfolio, unless you are one of the day trader types (no offence) - there's a lot of money to be made trading stocks, but its not my cup of tea - I'll be the first to admit it.

It was said of Mahatma Gandhi - the Greatness of the man was his simplicity. Well cheers to that! Here's a simple yet great 4 fund portfolio (credit for which should go to Taylor Larrimore over at the Vanguard Diehards forum on Morningstar)

Vanguard Prime Money Market (VMXXX) - put your emergency reserves here
Vanguard Total Bond Market Index (VBFMX) - put your bond allocation here (and hold it in a tax deferred account like a 401K/IRA)
Vanguard Total Stock Market Index (VTSMX) - put your US stock allocation here
Vanguard Total International Index (VGTSX) - put your international allocation here

Thats it - rebalance once a year and you're all set for life. Over the long term, this portfolio will beat a lot of "slice and dice" and complicated 15 fund portfolios.


You can always slice and dice along the way - maybe throw in some small cap, throw in some commodities, overweight emerging markets a little, but this 4 fund core portfolio will stand the test of time.

This portfolio gives you great diversification across the globe with the lowest possible expenses.

Rupee and the Dollar - cat and mouse game?

Not breaking news anymore, but the rupee is at an all-time high with respect to the dollar. So what.....?

# Well for starters, if you work in an software outsourcing company like Wipro, TCS, Infosys to name a few, or hold their stocks you would have felt some pain :-). These guys earn in dollars/euro etc but their costs/wages are in rupees. So if the rupee gets stronger, it eats into their margins.

# If you are thinking of retiring in India you would have seen your net worth take a 10% haircut.
And there's a double whammy - In an ideal scenario, lets say we have country I (India) with Inflation of A% and country U (USA) with inflation of B% and A is much larger than B and growing, then currency of U should appreciate against currency of I to offset the inflation (A-B). But look at the dollar - its going in reverse.

Where the rupee is headed in the future I don't know, but I believe the software lobby is too strong to let the dollar keep sliding. India will lose the "low cost" advantage that started the growth story that is India today. I'm sure the outsourcing bigwigs have had "talks" with the RBI to intervene (read buy forex to stop the dollar slide). Now, what was the compromise number that they agreed upon - 39, 40, 41 - time will tell :-)

So what can you do to hedge against the falling dollar (not only wrt to the Rupee, but other currencies as well)?

1) Invest a part of your portfolio in International Mutual funds. These funds will rise in value when the dollar falls (over and above the appreciation of the underlying equity)
2) Invest in commodities

Does diversification really help?

You must have heard the phrase - diversify, diversify, diversify. So how does one diversify?

The first step of diversification is to break your overall portfolio into

Equity (stocks)
Fixed income (cash or bonds)
and a third category that I'll call "commodities" (precious metals, energy, food products and heck even real estate).

Now within your equity allocation you diversify across countries (developed and emerging markets), across market cap (large, small companies), across value and growth and across sectors (energy, tech, Industrials)

Within your fixed income you diversify across Money market accounts, Fixed deposits, Short/Mid/Long term bonds, Govt bonds, TIPs, treasuries etc etc

Within commodities - you diversify across energy, precious metals, agriculture

OK, so lets say you did diversify your portfolio - try to put it to a real test - go back 10 years (or more) to spot a trend. You might see the following:

1) During a market downturn, your bonds/cash would have cushioned the fall
2) During a bull market - heck everything does well (maybe not bonds and cash as much)
3) Commodities are a good diversifier since they do not have a strong corelation with stocks or bonds and follow their own cycles
4) During (or due to) a downturn in the US market, international stocks (non-US) and emerging markets get hit much harder, but also bounce back much stronger

Moral of the story of-course being - don't put all your eggs in one basket - spread 'em around so they all don't all get crushed at once! Also, remember the popular saying - "There's always a bull market somewhere" - well if you are well diversified, chances are that you'll catch some of it :-)

How does one create a simple, yet fully diversified portfolio - coming up.....

"Irrational exuberance" back home?

Here is what scares me about the Indian markets, which have been on an absolute tear over the last 4 years and I'm talking doubling your money in a year kind of gains just by investing in the Sensex - amazing!

The scary part.....

1) Everyone's talking about stocks and dishing out tips (even at kid's birthday parties)
2) Sharply dressed 20 year old financial "advisors" are a dime a dozen and Mutual Fund houses are offering new "hot" funds every other day
3) The art of picking stocks has gotten easy - since everything has been going UP
4) TV channels are abuzz about the bubble (sorry - India growth story) and now we have official headcounts of dollar millionaires.
5) How can we ignore/neglect the infrastructure/corruption/poverty issues that India has to deal with going forward

My personal take on the situation is yes, Indian markets are at an all-time high right now and if I were to put fresh money to work at this point, I would hesitate.

BUT, that being said - I do believe in the growth story of India and 10 years from now, I think the SENSEX will be much higher than what it is today - so if you are a long term investor (as you should be) and can handle some volatility (I have personally seen my India portfolio take a 30% hit in one month - only to bounce back in the next couple of months) investing in India is a good option.

I'll keep the "how to invest in India" for later.

Recent volatility and Fed dropping rates....what did you do?

Well, the sub-prime mess that hit the US markets (and in-turn global markets) a couple of months ago, causing the Fed to drop rates raises a few questions:

How did you take the downturn - did you buy, sell or do nothing. It was a great opportunity is assess one's investments as far as risk goes. If you sold in panic, you have way too much equity exposure.

Personally, my portfolio was low on Emerging markets and I took the opportunity to buy into some emerging markets (VEIEX - Vanguard Emerging Markets Index fund).

Overall - if you did nothing that is great too - it means you are on cruise control with your allocations - "stay the course" as they say.

With the Fed lowering rates, I moved some of my cash holdings into fixed deposits (yielding 5.2% APY). IMHO, in the short term, CD rates for "idle" cash will beat Money Market and Online bank rates.....so here's the tip for the day - lock in those CD rates while you can :-)

Guilty? I admit I was.....

I wasn't really sure of where to begin - this being my first post and all - adrenaline rushing and thoughts of "hey I'm finally blogging". I admit I've come to the party about 10 years late, but hey I'm here :-)

Amidst all the confusion of where to begin, I thought I'd start by penning down some very common financial "sins" (if you can call them that). I can say that I have been guilty of committing a few of them not so long ago, before I checked into Vanguard's "clinic" of low cost Indexing for rehab :-)

So, to cut to the chase - are you guilty of

1) Hiring a financial "advisor" who has suckered you into "great" investments such as variable annuities, Life "insurance" policies, or high cost/load mutual funds. Yeah - those are really "great" - one small caveat - great for HIM, not for you!

2) Chasing "hot" stocks - either thru a "tip" from a friend or on bubbelvision (CNBC, Cramer)?

3) Not having an investment plan, based on your risk profile and financial goals and randomly making investments (be it stocks, mutual funds or Deposits in a bank) thinking that that'll suffice (or even make you rich)

4) Chasing high returns (yesterday's winners) and not understanding the risk - only to sell in panic when the first downturn hits?

5) Not planning your investments to be tax efficient? Remember that Uncle Sam takes away a LOT of your investment returns.

6) Not diversifying your investments - either held on to too many company stock options, invested large amounts in only a few stocks/funds that were not diversified across sectors and countries

7) Not having an emergency fund (about 8 months of living expenses) BEFORE making any other investments

8) Being "scared" of the stock market and parking too much cash in bank accounts/Deposits only to be eaten away by inflation and taxes