Investing is plain Common Sense

The Little Book of Common Sense Investing is an amazing book by John Bogle. Read this about the book you can buy on Amazon.

Investing is all about common sense. Owning a diversified portfolio of stocks and holding it for the long term is a winner’s game. Trying to beat the stock market is theoretically a zero-sum game (for every winner, there must be a loser), but after the substantial costs of investing are deducted, it becomes a loser’s game.

Common sense tells us—and history confirms—that the simplest and most efficient investment strategy is to buy and hold all of the nation’s publicly held businesses at very low cost. The classic index fund that owns this market portfolio is the only investment that guarantees you with your fair share of stock market returns.

To learn how to make index investing work for you, there’s no better mentor than legendary mutual fund industry veteran John C। Bogle. Over the course of his long career, Bogle—founder of the Vanguard Group and creator of the world’s first index mutual fund—has relied primarily on index investing to help Vanguard’s clients build substantial wealth. Now, with The Little Book of Common Sense Investing, he wants to help you do the same.

Some excerpts from the book:

Index funds eliminate the risks of individual stocks, market sectors, and manager selection.

Only stock market risk remains.

Don’t allow a winners game to become a loser’s game.

Fund investors are confident they can easily select superior fund managers. They are wrong.

The stock market is a giant distraction.

If the data do not prove that indexing wins, well, the data are wrong.

It’s amazing how difficult it is for a man to understand something if he’s paid a small fortune not to understand it.

The miracle of compounding returns is overwhelmed by the tyranny of compounding costs.

Interesting!! What do you think? Waiting to hear your comments.

What are Exchange Traded Funds

Basically, Exchange Traded Funds (ETFs) are open-ended index fund that can also be traded on the stock market.

Compared to Mutual funds, there are many advantages of ETFs, one is real time pricing, secondly long term investors are protected from short term traders. Hence it proves to be an ideal instrument for both long term as well as short term investors and also it is easy to buy and sell from the exchange.

One major disadvantage of ETF is that the investor should have a demat account and a broking account.

There are two types of advantages over index funds – one is the expense ratio which is currently lower in ETFs as compared to normal index funds. The second advantage is the distribution costs- the other index funds have to pay trail commission to the broker, while ETF does not pay the same. So the ETF cost will be lower.

In addition to the above-mentioned expenses, there also exist some `hidden’ costs like transaction costs. Such costs do not form a part of the expense ratio like brokerage and STT. The transaction costs however, are incurred by index funds but not by ETFs. This is another area where ETFs score over regular index funds.

ETFs don’t incentivise their product, which other regular mutual funds can do, hence there is no one pushing it.

But internationally what has happened that over a period of time people have found out that ETFs are ideal instruments and it has become more popular.

In India the ETFs have outperformed the actively managed funds over the last year.

Even though the actively managed funds have done better on a 3/5 year scale, the net difference would be lower or non existent because of the higher cost. The active funds charge you 2-2.5% while the ETFs charge around 0.5% only. The extra Fund management charges will even out the difference, I guess.

I wonder why a good product like index funds does not sell like hot cakes. Comparatively an expensive product like ULIP is selling like hot cakes even though it is much more expensive than the MFs??!!

I guess it boils down to lack of knowledge/information and that the agents have no interest in selling them.

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Financial Planning is Life Planning

I have always been smug with my assumption that a sophisticated finance professional will take care of all my wealth creation needs. But the day my over friendly and over smart advisor came, I was more confused when he left than when he had entered!! He talked about sophisticated jargons, terms, options, technology, software, analysis and at the end of it asked me to decide on my own risk appetite. Damn it, if I have to do my own analysis what the heck was he doing, sitting smugly on my sofa while I looked like a sheep in my own house.

To be fair to my financial advisor, he helped me understand that one must take responsibility for oneself. And he logged me on to the fascinating world of finance and investing. As part of the learning process I have built this e-scratch pad and have really enjoyed the process.

My initial findings – investing is no rocket science and can be easily understood by a layman.

There are very interesting tools and calculators available which even a child can use and play with.

It’s easy to be overwhelmed with the investment options. 650 odd Mutual Funds, More than 2000 scrips to choose from, options, futures, commodities, real estate, deposits, insurance, tax saving schemes and bonds like PF, NSC, KVP, Infrastructure bonds, et al……. At times I feel the importance of the proverb: ” Ignorance is bliss”

Apart from the overwhelming options, you are faced with finance jargon, terminologies, irrational behaviour of the stock markets and smug finance professionals.

Wait a minute. It’s critical to be responsible for your wealth and as I said in the beginning, it’s pretty interesting too! Here’s a indicative list of what you should know for a start and I promise I’ll take them one at a time.

1. Why to Invest, Golden rules of investing, Your Financial planning steps.
2. Introduction to stocks, derivatives, options.
3. Introduction to Mutual Funds
4. Introduction to Insurance
5. Product review.
6. Sensex review.
7. Asset allocation, Time, Value of money, etc….

More in the next post!