The Contented Investor

One of my teachers once told me, "stare at every graph and every equation you encounter. Milk all the possible information you can out of them before you move on." This advice helps me on an everyday basis: to teach, research and learn personal finance. Most importantly it allows me to be a contented investor. When it comes to personal finance one graph and one equation does this more than anything else.

The Graph: Take a look at this graph. It represents the growth of a SIP corpus (monthly investment of Rs. 1000) compounding at the rate of 8% per year.

SIP

The gaping difference between the invested and maturity amount as the years increase of course reflect the 'power of compounding'. Nothing new there. Look at the blue arrow around 3.5-4 years. To the left of the arrow the red and back points are close to each other. To the right of the arrow they branch off. What does this tell us?

  • Define short-term goals as anything below 3-5 years approximately.
  • Define long-term goals as anything above 10 or more years.

For short-term goals:

  1. Effect of compounding is small/negligible.
  2. Therefore returns do not matter. Inflation is manageable if not negligible!
  3. Capital protection is crucial. So no risk of capital and no volatility in returns.
  4. Tax outgo could optionally be minimized. If returns are not important neither is tax

Therefore:

  • Don't waste time selecting the perfect debt fund. Just pick one which matches the above conditions: Liquid funds or Ultra-short term funds. Analyzing if funds like a dynamic bond funds or income funds will do the job is time not spent well. Such funds,  in my view, do not meet the above conditions (which ones?)
  • If you are uncomfortable about debt funds use a FD for a lump sum and a RD for small periodic investments.
  • Key take-away: Don't waste time and effort worrying about short-term goals. If returns are not important, where you invest also does not matter as long as it is safe.

For long-term goals:

  1. Effect of compounding is crucial.
  2. Therefore inflation is also crucial (inflation is negative compounding). So returns must beat inflation.
  3. Volatility in returns resulting in short-term risk of capital is necessary to get returns that can beat inflation.
  4. Since risk is inevitable, lowering risk is crucial.
  5. Lowering risk  can achieved by diversification  and rebalancing. These enable capital protection.
  6. Tax outgo must be minimized.
  7. Returns matter but a not a single return but the average of returns from diversified investments.
  8. Near impossible to achieve all of the above by investing in a single product. So child-plan, no pension plan, no money-back schemes.
  9. Where to invest is a wrong question. How much to invest where is the right one. One should diversify across instruments differing in risk (equity, debt, gold etc.) and also diversify among different equity and debt components (large-cap stocks, mid-caps, international equity etc.)
  10. Periodic monitoring and rebalancing necessary to ensure the average compounding is on track.
  • phew! Key take-away: Long-term investing is complicated! It requires a lot of time and effort to learn and monitor. Spend this time after you begin investing and not before. Getting started with some basic knowledge (can be obtained within a week) as early as possible is important.
  • Don't invest to get good returns. Invest to get returns that beat inflation.
  • If you are risk-averse you must invest in equities! (the risk referred to is inflation risk)

What determines the  % of equity and debt investment, debt etc. ? We need 'the' equation to determine that.

The equation: 

Future value of a sum = (Present value of a sum) X(1+return)(No of years invested)

The good old compound interest formula. It is well known that if we begin investing early then

  • we will end up with a large corpus.
  • we need to invest a much smaller sum to reach our goals

What is often not made explicit enough is

  • we could afford to take much lower risk than someone who has started late.

Consider two friends A and B. A is going to be a father next month while B has a 7 year old daughter. B realizes that he has not saved anything for his daughters education and begins to do so. To ensure A does not make the same mistake, he urges him to start investing right away. They both decide to use a goal planner. Here are the numbers:

  • Present cost of degree: Rs. 10 Lakhs
  • Inflation: 10%
  • Due to their personal circumstances both can afford to save no more than about Rs. 10,000 each month.
  • A has 17 years before his child reaches college
  • B has only 10 years before his daughter reaches college.
  • Due to inflation B has to save Rs. 25.9 Lakhs and A Rs. 50.5 Lakhs
  • Although A has to save about twice of what B has to, because he begins early he could afford to invest in instruments which gives about 9% return each year.
  • B must ensure he achieves a return of about 13% each year

Thus A can afford to invest in very little or no equity while B has to have much more equity exposure in order to get close to his goal. The numbers may appear unnatural and fixed but the message is clear:

A persons risk appetite (how much risk he can take) is relevant only if he begins investing early. For the late starter, the goal requirements will dictate how much risk he must take. The risk appetite becomes irrelevant in such cases.

  • We can't take it with us but we better ensure we have enough when we need it.

Can you tell me why I titled this post, 'the contented investor'?! 🙄

After I received a couple of interesting comments on who is a contented investor, I read this quote by Benjamin Graham in Hemant Beniwal's latest post

“People don’t need extraordinary insight or intelligence.

What they need most is the character to adopt simple rules and stick with them.”

To me this perfectly sums up the attributes of a contented investor. Do you agree?

Install Financial Freedom App! (Google Play Store)

Install Freefincal Retirement Planner App! (Google Play Store)

book-footer

Buy our New Book!

You Can Be Rich With Goal-based Investing A book by  P V Subramanyam (subramoney.com) & M Pattabiraman. Hard bound. Price: Rs. 399/- and Kindle Rs. 349/-. Read more about the book and pre-order now!
Practical advice + calculators for you to develop personalised investment solutions

Thank you for reading. You may also like

About Freefincal

Freefincal has open-source, comprehensive Excel spreadsheets, tools, analysis and unbiased, conflict of interest-free commentary on different aspects of personal finance and investing. If you find the content useful, please consider supporting us by (1) sharing our articles and (2) disabling ad-blockers for our site if you are using one. We do not accept sponsored posts, links or guest posts request from content writers and agencies.

Blog Comment Policy

Your thoughts are vital to the health of this blog and are the driving force behind the analysis and calculators that you see here. We welcome criticism and differing opinions. I will do my very best to respond to all comments asap. Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete  the entire comment or remove the links before approving them.

37 thoughts on “The Contented Investor

  1. ashalanshu

    Dear Pattu, the title is for the acceptance of the given financial situation where we can achieve our goals without worrying too much about thePERFECTNESS of process. In real life, nobody cares for simplicity & keep wandering in search of the Mirage called Perfect Product.

    Thanks

    Ashal

    Reply
    1. pattu

      Thanks Ashal. That is indeed one way to look at it. The way I see it a contended investor is one who is very clear about his priorities and is not swayed by outside influences. The ending quote in Hemant Beniwals latest post sums it up perfectly

      “People don’t need extraordinary insight or intelligence. What they need most is the character to adopt simple rules and stick with them.” - Benjamin Graham
      That is the perfect description of the contended investor.

      Reply
  2. Kapil Tiwari

    Pattu, you have used the term "contended", an "adjective" most of us have not come across. Assuming that you have invoked a special poetic licence bestowed upon you, you have perhaps drawn the word from "to contend" or "contender". While "contender" connotes the availability of choice to contest/compete/strive, a "contended person" lacks this luxury of choice. A "contended investor", hence, is a person "resigned to" follow the available avenues of investment. On a positive note, a "contended investor" seeks not to "explore and procrastinate" but to "accept and act promptly".
    My two-penny 🙂

    Reply
    1. pattu

      Thanks for your thought. Not sure I agree. The way I see it a contended investor is one who is very clear about his priorities and is not swayed by outside influences. The ending quote in Hemant Beniwals latest post sums it up perfectly

      “People don’t need extraordinary insight or intelligence. What they need most is the character to adopt simple rules and stick with them.” - Benjamin Graham

      Reply
  3. Vandhana

    That graph was an eye opener. Especially for a lot of ppl who withdraw from their PF or other long term investments for short term goals...Can I request for a calculator around that? Something that plots the graph based on monthly investment...with options to stop the investment after a certain time...also with another line to show post inflation corpus??? That would be really helpful to look into everytime there is an urge to take a loan from PF or to stop the SIP....Thanks for clarifying how to plan for short term and long term goals !

    Reply
    1. ashalanshu

      Dear Vandana, there is nothing wrong in your demand & hopefully dear Pattu, 'll oblige you also but can you co-relate my comment of Simplicity with your demand?

      Thanks

      Ashal

      Reply
  4. amol

    Dear Pattu, I am 36 years old.My take home salary is 28,000/- out of which can save 20,000/-.
    I already have a residential plot and also want to buy another plot after 02 years which costs me 5 lakhs( for investment purpose only). For this goal, I am saving 20,000 per month in RD.
    Now, after reading your article, I am somewhat confused regarding my goal. Would it be worthwhile to invest in MF via SIP the above 20,000 per month or continue RD for 2 years and then start SIP? Whether invest now to buy plot or start SIP now for long term? Plz guide me.

    regards
    amol

    Reply
    1. pattu

      Hi Amol,
      If the house in which you live is your own and if it is built recently then my advice would be to wait before buying a second house.

      Ensure you have enough emergency fund for at least 50,000
      Get enough term life insurance and health insurance right away
      List your goals and find out how much to save for each of them.
      If you are saving everything you can in the RD then I suggest you break the RD and start a SIP in good MFs. you can also start a PPF for the debt component of your long term goals.

      Once all the above are complete, your investments are in place then and only then think of getting a second house

      Reply
      1. amol

        Dear Pattu sir,
        Thanks for your esteemed reply. Sir, my goal is to buy a plot/land- not a house- after 2 years which costs me nearly 5 lakhs, Here,70 km away from Nagpur , land/plot is available at Rs.300 per square feet. We can get good returns in future.
        Sir, I have 2 options-1. to buy land after 2 years or
        2. Start SIP( for 10+ years) instead of option 1 above.
        What should be better for me?

        regards
        amol

        Reply
        1. pattu

          As I said before if you own your house then start investing for your long term goals via SIP. After a few years when you are financial comfortable salary-wise you can think of land investments. This is what I will do.

          Reply
          1. ashalanshu

            Dear Amol, let me answer your basic query differently. Instead of you, I'm purchasing that land/plot 70 Km away from Nagpur & after 3-4 Year, I'm selling it to you @1500 Rs. PSF price. Now do tell me, 'll you purchase it at that time in 2016-2017? If yes, why? & if not , again why?

            Please elaborate the reason behind either of your choice?

            Thanks

            Ashal

  5. amol

    Dear Ashal ji,
    Your question to me -Will U Purchase land @ 1500Rs in 2016-17?- No , I cant buy it after 3-4 years as the prices of land will be beyond my saving. Even @ Rs.750/- will be impossible to me.

    Sir, if I buy plot after 2 years and then start SIP for 10+ years, I will get benefit of compounding less as compared to the SIP if I started it right now.
    Hence , I am thinking what to do?

    regards
    amol

    Reply
    1. ashalanshu

      Dear Amol, if you think you can not afford such high prices after 3-4 years, how 'll you be able to sell someone else in your place? I mean from where you 'll earn your profit, If every other person founds the prices out of reach just liem you? Think over it.
      thanks
      Ashal

      Reply
  6. SWAPNIL D. KENDHE

    Character is really the most important thing. Whether you have bad finances or bad Health its really because of your character has faltered somewhere.

    Reply
    1. pattu

      I agree character is important. However it not always related to bad health or even finances. Sometimes people get thrust into a situation they have no control over without preparation.

      Reply
  7. Bedabrata Banerjee

    HELLO MR. PATTU, MANY MANY KUDOS FOR YOUR WELL RESEARCHED ARTICLES AND ASSOCIATED CALCULATORS. I AM A 53 YEARS OLD, WORKING IN PUBLIC SECTOR INSURANCE. AFTER READING YOUR OUTSTANDING BLOGS, I HAVE TOLD ALL MY RELATIVES AND COMPANIONS INCLUDING MY DAUGHTER AND NIECE AND THEIR HUSBANDS TO GO THROUGH YOUR BLOGS AND FOLLOW UR ADVICE THROUGH THE REST OF THEIR LIFE
    . I HAVE NO RESERVATION IN DECLARING THAT IF I COULD BE ADVISED IN THIS WAY 25 TO 30 YEARS BACK, MY APPROACH TOWARDS ACHIEVING FINANCIAL GOALS IN LIFE WOULD BE DIFFERENT AND FAR MORE POSITIVE . IT IS A KIND OF GREAT PRAISEWORTHY SERVICE TO OUR SOCIETY FROM UR CORNER. I PRAY TO THE ALMIGHTY TO BLESS U AND YOUR NEAREST.

    Reply
  8. Bedabrata Banerjee

    HELLO MR. PATTU, MANY MANY KUDOS FOR YOUR WELL RESEARCHED ARTICLES AND ASSOCIATED CALCULATORS. I AM A 53 YEARS OLD, WORKING IN PUBLIC SECTOR INSURANCE. AFTER READING YOUR OUTSTANDING BLOGS, I HAVE TOLD ALL MY RELATIVES AND COMPANIONS INCLUDING MY DAUGHTER AND NIECE AND THEIR HUSBANDS TO GO THROUGH YOUR BLOGS AND FOLLOW UR ADVICE THROUGH THE REST OF THEIR LIFE
    . I HAVE NO RESERVATION IN DECLARING THAT IF I COULD BE ADVISED IN THIS WAY 25 TO 30 YEARS BACK, MY APPROACH TOWARDS ACHIEVING FINANCIAL GOALS IN LIFE WOULD BE DIFFERENT AND FAR MORE POSITIVE . IT IS A KIND OF GREAT PRAISEWORTHY SERVICE TO OUR SOCIETY FROM UR CORNER. I PRAY TO THE ALMIGHTY TO BLESS U AND YOUR NEAREST.

    Reply
  9. Gopinath CJ

    This is what warren buffett says about compounding " no matter how great or effort, some things just take time: You cant produce a baby in one month by getting nine women pregnant"

    Reply
  10. Kamal

    Pattu Sir,

    One stop read for people who are confused as why one need FD/Debt Fund giving poor returns ? or Why risky equity if one can get good return and safety with FD ?
    And mostly end up either putting their short term money in equity or accumulating long term need money in Fixed Deposits.

    The need of short term Capital protection and long term wealth creation can not be simplified better than this.

    Reply
  11. Prashant

    Dear Sir,
    Thank you so much for putting in so much effort into this superb blog. It has so many things for a newbie like me. I have just started a job and have been researching to understand about investing. I have a question, that may sound very foolish, but I will be grateful if you can solve my doubt. I am reading everywhere about choosing just a few funds and simplifying portfolios etc. I am also reading how SIP is not as good as lumpsum investments. All the professional websites only sing praises of SIPs. My question is, if I choose to invest lumpsum but regularly, in a simplified portfolio, what does it really mean? I choose 2-3 funds I like, and then invest money every month or every few months in the same funds? So in this case, do I need to check the NAV or market and invest the day the price is low? I know my doubt must look very immature, but I am really unable to understand from the blogs I am reading as to how to invest regularly, if not using SIPs? Thanks in advance for your reply.

    Reply
  12. Prashant

    Sir, I am glad to tell you that I found the answers to all my doubts after reading more posts from your blog, including the "Retirement Planning: My Story So Far". Thank you very much

    Reply

Do let us know what you think about the article