Buying stocks when everyone is bullish, at stretched valuations, always ends in tears.
“Simple and boring is the way to successful investments. Leave the flashy experiences for the movie theatres,” Ajay Bagga, Head, Private Wealth Management, Deutsche Bank India, tells Business Line. Excerpts from an interview:
Do you take your own financial decisions or do you rely on advisors?
Having worked in the financial services industry for over 23 years, I prefer to make my financial decisions. But I do have the humility to recognise that things change fast. So a good financial advisor can add value, not only in terms of the breadth of advice but also in all the related convenience and services that they can bring to the table.
How do you differentiate the goals and investment requirements for the same, for each member of your family?
It is a mix of financial goals, time horizon and risk appetite, and woven around each family member’s financial situation. So for an older member in retirement, stability of returns is most important, while for youngsters just starting their careers, long term risk adjusted returns are critical.
Which factor do you look for most in an investment — risk, returns, liquidity or income generation?
It depends on the overall asset allocation and the role that the investment plays in it. For example, I use equities for very long term financial goals and don’t trade in them for the short term. Income funds are used to smoothen cash flows and generate present income. Real estate is for stay or for long term capital appreciation. Gold gives an inflation hedge and is a store of value during an emergency. What is critical is that one should understand what one is investing into, for what objective.
How much money do you set aside for investments generally?
I try to save at least 20 per cent of my post tax income and invest it according to my asset allocation plan, through market cycles. However, since incomes vary sharply in line with the economy, and markets in finance, the absolute number varies across various points in the market cycle.
What was your first investment?
US-64. My father used to invest in it and it used to give a very good fixed return every year in the form of dividend.
How do you plan investments to beat inflation?
By investing in equities and real estate, both of which beat inflation handsomely over the long term. I have invested in equity funds at Rs 10 in the mid-90s and seen them giving 30x returns in 15 to 20 years, comfortably beating the 4x growth of inflation in the period. Real estate returns have been lumpy, non-linear in contrast, with much longer cycles, but with patience, I have been able to easily beat inflation in that too.
How has your allocation to different asset classes changed over the years?
As a youngster I was 100 per cent in equities and equity funds. As I grew older and made mistakes, I started valuing peace of mind, lower volatility and preservation of capital over sheer growth. Today, I am 50 per cent in real estate, 25 per cent in equities and 25 per cent in fixed income products, including my retirals. Liquid financial assets would be 50 per cent in equity and 50 per cent in fixed income, which is conservative for a mid forties executive.
What have been your best and worst investments so far? What lessons have you learnt?
Concentrated, long term bets pay. There is one stock I have held for 22 years, my cost is less than 1 rupee and the stock trades at Rs 2,800. There have been many bad investments, at almost every peak of the markets, in the late 1980s to 2000. Going with the herd, buying at stretched valuations when everyone is bullish , always ends in tears. That is a lesson well learnt.
What corpus are you comfortable retiring with? How are you building it?
I do similar planning for clients for a living. So, I use simulations to plan for my retirement corpus with varying levels of inflation, returns, volatility and exigencies built in. One broad thumb rule investors can use is, assume 6 per cent inflation, understand how much of your present expense you will incur in retirement, add on higher health costs and limit yourself to not more than 4 per cent drawdown from your corpus. If the math works, you are well settled. If it doesn’t, save more, invest more and spend less today. I have diversified my portfolio and am rebalancing it slowly to meet my retirement corpus target.
What is the best investment option towards saving for retirement, in your view?
At as young an age as one can, put as much money as possible in equities and real estate. Keep adding to it every year, learning from mistakes as you go along. Let it grow for 30 to 40 years, and you are set. It is quite simpleif you are disciplined, diversified and if you ignore the market noise.
What is your advice to young investors?
Work hard and make a career so you can earn a lot. Then learn to spend it wisely and save a large portion of your earnings. And invest these savings, as early as you can, in as diversified a way as you can, in equities and real estate. Read a lot. Don’t believe anyone who promises supernormal returns. Read, reflect, train yourself to understand the basics of investment, and stay invested through market cycles. Simple and boring is the way to success in investments. Leave the flashy experiences for the movie theatres.
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