03 August, 2015

The Gold conundrum

Gold has had an allure with people, since times immemorial. Gold has been used for ornaments and as embellishments since the yellow metal was discovered. Part of the attraction is it’s malleability, ductility & inertness. Partly, it is due to the rarity of the metal itself.

Indians have always had a soft corner for the yellow metal. Kings of yore used it in their currency. They used Gold as a store of value. The one with the higher gold reserve in the treasury was hence the richer one. Also, gold was extensively used in their palaces & personal effects as a statement of wealth & grandeur.

We have continued with that tradition of seeking to invest in Gold even today. But, is gold investment a good option now?

Advantage Gold -  

Gold is a unique metal in that it is inert. It can easily be drawn into whatever form one wishes and hence very suited for intricate designs in jewellery. In today’s context, Gold is seen as a store of wealth due to another reason. Governments print currency notes and hence they get debased and their value plummets. Gold is very good in that gold supply cannot be increased by governments at will. Hence, Gold will always have a certain intrinsic value.

Gold has been used as currency or has been part of currencies. In times of chaos / turmoil, when currencies lose their sanctity, Gold will still hold it’s value. Infact, in such a situation, only Gold will really have value.

Also Read: Get locked into debt instruments

The rants against gold 

Gold has negatives too.  Gold does not offer any returns unlike equities, FDs or property. It just sits there. In that sense, it is a dead investment. The returns from Gold come only when one sells it.  What’s more, there may be costs associated with holding onto Gold in terms of storage costs ( bank lockers ), insurance etc.

The historic returns of Gold have not been anything great – about 7%. Gold has very long cycles – about 30 years. 10 years of bull cycle and 20 years of bear cycle. The latest ten year bull cycle was between 2001-2011. The bear cycle has begun from 2011 onwards and hence is expected to play out for several years now.

Why is gold price falling ?  

Apart from the bearish cycle, there are other reasons. Due to the bull years all gold mining companies have increased their production capacity. The production capacity has gone up by 25% in the past few years. Gold production is now above 3,100 tonnes. This puts a dampner on gold prices straight away, especially when the demand is muted. 

Gold is inversely correlated with the dollar. Dollar is showing strength on the back of reasonable performance of the US economy. Also, dollar would probably further strengthen due to interest rate increase in US treasuries - which is bad for gold. China is not buying as much gold as anticipated, which is now a dampner. Greece Exit from Euro can aid gold, but that does not seem a possibility, for a while now. The other important reason why gold is trending lower is due to automated trades. These days, when gold hits particular levels automatic sell orders are triggered which brings down the value even further, making it a vicious cycle, where gold keeps trending lower and lower.

Should you invest in Gold now? 

Gold is an asset which is negatively correlated to Equity, currency & has low correlation to other investments. This makes it a good asset to have in the portfolio to reduce risk.  But there is no specific percentage that needs to be there in the portfolio, necessarily. It can be there upto 10% in one’s portfolio. If there is lot of equity in the portfolio, there can be a bit of gold in the portfolio to lend stability.

When we invest in assets, it cannot be only for returns. Sometimes some of the investments form a part of the strategic asset allocation in a portfolio. Gold investment should be treated as such. It cannot come in and go out of the portfolio, just because the asset is not performing now. Every asset does well at some point and does not perform at others. That is no reason to cash out.

The question uppermost in most peoples’ mind today is whether this is a good time to invest in Gold, now that it has corrected. It looks like a falling trend and gold may further correct. Internationally, Gold has breached USD 1,100 mark. Many experts following Gold closely have been of the opinion that Gold may go down to USD 1,000 by December 2015 and can even trade in three digits from thereon.

However, this is just an expectation and cannot be taken as conclusive. Hence, it might be prudent to invest in tranches over time.

How should you invest in Gold? 

Gold investments are best done in the form of financial assets – ETF or Gold MF schemes. In financial assets, one need not worry about the purity of gold, there is no storage, insurance cost & one is assured of the same returns which physical gold can offer. Also, when bought in physical form there is a cost of making it into coins, bars etc., which can be avoided when gold is bought as a financial asset.

Many people think that buying jewellery is an investment. It is not. It is just an expense as there are making charges and losses etc. which would have to be forfeited when the gold jewellery is surrendered for cash.

In conclusion -  Gold investment should be in the form of Financial assets and not in the form of jewellery. This may disappoint the ladies who have been under the impression that buying jewellery is an investment. Buying gold now in tranches would be fine. The most important thing is not to get carried away.  The golden rule is to stay with your recommended asset allocation & stay invested..

Article was published on Linkedin on 3rd Aug-15

02 August, 2015

Do you wish to retire early? It may not be a good idea. Here’s why

You are 30 and want to retire at 45? Why not? That's what a lot of people at the first leg of their careers think. Retiring early is in today.

Many people say that they want to do their own thing after retirement. It's not that they may not be earning… but the earnings after their early retirement is incidental. To put it in another way, they want to attain financial self-sufficiency by the time they retire.
 Is retiring early feasible?

This is a very broad question. It's going to be feasible in some cases and is going to pose lots of challenges in others. Infact, we will have problems in a whole lot of cases.

The first reason is that most goals are completed by the time one retires by age 60. But, if one is retiring at say 45, most of the goals will be met from the corpus one has accumulated, putting enormous pressure on one's finances.

The second reason is that there is more time for which one needs to plan and less time to accumulate the higher corpus needed. It's a double whammy.

Let's understand this in a bit more of detail.

Also Read: Review your retirement kitty regularly

A much bigger corpus, needed much earlier

Today, people live for very long in retirement. It could well be three decades in retirement. That's a pretty long time. The unintended effect of retiring early is that the retirement period can now be 45-50 years. While retiring early, one now needs to have a much bigger corpus as it needs to last for much longer. But, this much bigger corpus has to be built in a shorter timeframe, which is the huge challenge.

Let's take an example to understand this. Mangesh is 30 and wants to retire by 45. His expenses as on date are Rs 40,000/-pm. Let's assume that expenses come down by 25% in today's money, at the time of retirement. That means an expense of Rs 30,000/- pm. Here we are not even considering the other goals. Assuming that inflation is 7%, the expenses in the first month of retirement at 45 would be Rs 83,000/-pm approximately. Assuming an investment return of 8% throughout the retirement period, the corpus required to take care of just the expenses (inflation adjusted) for the next 45 years would be Rs 3.6 crore!

Now let's assume everything remains the same in the above example, but the person retires at 60. The period to provide for would be 30 years. The monthly expense in the first year of retirement is Rs 2.28 lakh. The corpus required then would be Rs 7.08 crore. But for like to like comparison, if we reduce it (by a 8% factor) to what it will be at age 45 of the person, it would be only be Rs 2.23 crore. Looking at it differently, an amount of Rs 1.37 crore difference is the amount that will be extra as the expenses would have been taken care of, as the person was working between 45 & 60.

Impact on various goals

A goal like retiring early can impact other important goals like child's education, buying a home, travel, buying vehicles etc. as the money required for just the retirement goal would be huge.

Early retirement would hence be feasible, in most cases, only if one scales down/compromises on goals. The only situation where early retirement would be feasible would be a high income earner, who is at the same time a very low spender & has few high value goals. In such cases, the corpus can be accumulated fast and early retirement would be feasible. But such people are rare indeed.

So, in normal cases retiring really early will be a huge problem. We have seen that retiring a few years earlier is a workable alternative.

What one will be forgoing by retiring early

One of the negatives of retiring early is forgoing the high income in the last few years of one's earning years. It is seen that the savings potential in the last ten years is equal to the saving potential in the entire working life, till then!

There are reasons for that - in the last few years, income would be at it's peak, all the typical goals would already have been met or provided for, loans may not be present or loan EMI would be a small portion of overall expenses and lifestyle requirements would have moderated. Also, some expenses could have ended - like education/ classes etc. & college expenses have already been provided for. In case where the children have left home to study or to work, the actual living expenses itself would come down.

Another big advantage that, people who retire at the normal superannuation age, is the much longer time available for their investments to compound. This looks like a small advantage, but can be massive if one were to calculate the corpus size after those years.

Yet another advantage of people working longer is that their expenses are taken care of till their retirement. They need to provide for only after that. In contrast, for people retiring early, not only do they have to dip into their corpus for expenses earlier, they will also have to provide for a longer tenure.

Clarify - What do you really want to do?

This is a very important question which people have not answered.

People give vague answers like they want to get away from the rat race, they are fed up of office politics etc. & some say that they want to pursue their interests.

The former sounds like escapism. As far as pursuing one's interests, it can well be done here and now. One can always create the space for it. We cannot lead meaningless lives till a point and then take a U-turn at one point & lead lives with meaning.

Life is always green on the other side. The man in the plane looks out and sees a man lying on the meadow & thinks how fortunate he is. Man below looks up wistfully & wishes he were in that plane! Such is life.

We keep running after what we cannot get & when we get it, we want something else. Just like
Joker in The Dark Knight, who said - I am a dog chasing cars. I wouldn't know what to do with one, if I caught it! Aren't we a bit like that?

Article was published on firstpost.com on 29th Jul 15