This is the second part of a simple solution to all your investing problems. Check out the part 1 which is about the background to this post. This post is about the thought process that went into making of the 88% solution.
The Thought Process:
Before I tell you about the 88% solution, it would make sense to know the thought process behind:
1. Paralysis by Analysis: There are 300+ insurance schemes, 1000+ mutual fund schemes, 2500+ stock scrips and hundreds of deposit schemes to choose from. Is it possible to analyse them and come to a rational decision? Even if it’s possible, wouldn’t it paralyze your decision making ability? Wouldn’t it be a good idea if I have to choose from a set of 10 products which is being recommended by a person not interested in selling those products?
2. There’s a lot of noise: If you look up to TV, Newspapers for tips, let me pray for you. There are so many conflicting views (and all of them appear confident and right), that you can get confused. I look for information, not views/tips from the Newspapers/TV. But it may be a good idea to close down that noise altogether.
3. Timing the market is impossible: Nobody actually knows whether the market is going up or down. And When! I have made countless attempts at predicting the market and hoping to time my investments. I have failed more often than not. There’s merit in being regular and automate your investments rather than trying to time the markets.
4. 4 Parameters for your investment decision: Before taking an investing decision, you need to look at the likely returns, liquidity, safety and the cost. Figuring out all the four factors can help you take a rational decision.
5. Mutual Funds are more costly than ETFs: Having discovered the abilities of stock experts, I also discovered that we pay a lot of fee for their fund management abilities. I have also learnt that majority of the fund managers under-perform the market indices. And they get paid from our pockets for underperforming the markets!
6. Riding the momentum wave is not for long term: We have everyday reports of top gainers and losers. And there’s a whole lot of day traders riding the wave and appearing to make good money every day. But along the way, we have also seen suicides when the markets crash. To me, it is a zero sum game where you win some and lose some. Eventually balance it out.
7. Discipline/Emotion Control is important: It is easy to get waylaid by emotions of greed and fear. It is important to understand this risk and continue with your investing.
8. Getting Started is the best Investment decision: Yes, we delay getting into money decisions because of a variety of reasons. Like:
• Huh, I’m just 24.
• This financial planning is so non happening thing.
• I have no money.
• I don’t understand the jargon.
These are excuses and not reasons. It prevents you from getting started. But how do I get started, you ask.
You can check out the 88% solution!
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Well good post ranjan..I would like to know more on how ETF’s differ from the traditional Mutual Funds…
Thanks,
DAJ…http://nobleconsultants.blogspot.com
ETF is a stock itself and you can buy on the NSE/BSE directly while traditional Mutual Funds are available through a AMC (Asset Manager). So the ETF is less costly than the MF where you pay the Fund Manager too.
ETF is passively managed. Means that it just reflects the index it is benchmarking. Nobody pushes ETF because it doesn’t entail any commission to them. That’s one big reason why ppl don’t know about them.
Thanks for stopping by. Let’s spread the word!
Ranjan – Grt information and valuable insights to investing. What are the best ETFs available today to invest on a monthly basis? With no entry loads on MFs are ETFs still the best bet?
Thanks
RK
@RK. The ETF have lower expense ratio in the following years. Ranges from around 0.5% to 1%. While the MFs have expense ratio of upto 2.5%.
You say majority of fund managers underperform the market indices. Any data in Indian context for this?
Here is my analysis : http://businesspandit.wordpress.com/2009/07/16/efficient-market-hypothesis-in-india/
Most Indian mutual funds perform 2-4 times better than indices. A huge margin.
@Ranjan.Thanks for the info…Spreading the word!!