Long-Term Goal Planning

Long-term financial goals

Greater than 10 years

VitalInflation

Returns Important because inflation is important

Taxation Important because inflation is important

Inflation in India: Some Real Numbers

Jan 1995 to May 2014

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

Permanent loss in capital

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!yearscorpus inv(1 return)

yearsinvcorpus (1 )return

returncorpus (1 )inv years

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

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

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

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

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

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

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

Sensex Total Returns Index: 1979 to 2013

5%

S&P 500 Total Returns Index: 1871 to 2013

Source: http://www.moneychimp.com/features/market_cagr.htm

12%

Sensex Total Returns Index: 1979 to 2013

S&P 500 Total Returns Index: 1871 to 2013

Normal Distribution

Source: http://www.mathsisfun.com/data/standard-normal-distribution.html

68% of values are within1 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 500 1871 to 2013

Sensex 1979 to 2013Annual Returns

Sensex 1979 to 2013Annual returns

Sensex 1979 to 201315 year CAGR

Sensex 1979 to 201315 year CAGR

Transformed Distribution: Square Root

14% +/- 4%

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

RiskStandard Deviation

Higher risk does not imply higher return!

Asset Allocation

Time Frame Conservative Moderate Risky Mad-Max

< 5 Years FD/RD ~ 10% Eq 30-40% Eq > 60% Eq

7 Years FD/RD 10-20% Eq 40-50% Eq >60% Eq

10 years FD/RD 40% Eq >60% Eq 100% Eq

10-15 Years <40% Eq 60% Eq 80% EqFD/RD100% Eq

>15 Years < 60% Eq 60% Eq 80% EqFD/RD100% Eq

Time Frame Conservative Moderate Risky Mad-Max

< 5 Years FD/RD ~ 10% Eq 30-40% Eq > 60% Eq

7 Years FD/RD 10-20% Eq 40-50% Eq >60% Eq

10 years FD/RD 40% Eq >60% Eq 100% Eq

10-15 Years <40% Eq 60% Eq 80% EqFD/RD100% Eq

>15 Years < 60% Eq 60% Eq 80% EqFD/RD100% Eq