Mariners - Safety and Asset allocation
Prelude: How fast time passes - is a cliche'.. Well not quite. It's been 2 months since I posted here. It's not that I haven't written. In fact I have written over 50,000 words but have not been able to assimilate thm in one place for people to read.
This article was written exactly 25 months ago but was probably lost to digital storage.
Whenever I have written anything in the field of finance or psychology it has been mostly for seafarers and that has been aptly demonstrated in the Titles of articles, books, and groups that I have formed.
The reason for my focus is mainly because to understand the psychology, requirements, challenges of a Seafarer- I don’t have to exert or research. From morning to evening – whether I was at sea or now on land- I was constantly observing them and observing the commonalities and also the differences between them.
As I have mentioned quite a few times before at various forums the first thing that struck me was somewhat ignorance at planning for future, and this I observed in my seniors more than the juniors. In fact, the crew was always smarter and with their penchant to spend less and less they had actually impressive businesses going for them. Except for a handful the Officers were without exception into – you guessed it- REAL ESTATE or Property as they called it. I do not remember a single person who told me that he had sold a property and used it for consumption. But…anyway we’re going off track here.
What I actually wish to delve upon is the topic of retirement. This is a word that can create great anguish in a shore-based person- depending what position he is working in. The higher the position – greater is the insecurity. This insecurity is not so much about the financial part as most of them have impressive pensions and provident funds and gratuities and superannuation funds and bonuses and the works. For them it is more about them losing the importance and social relevance once they’re off the “seat”.
Not so much about our adroit Mariner!!!
Even at 58 he considers himself fit enough to go for another few years. Mostly he has the same attitude to money and it’s planning as he had on the first day at sea. Social relevance is not important to him because he hasn’t really cared about the society so far and considered his family to be his universe. So he is free from all those complexes that his neighbor Chaubey ji – who is a Chief Manager in a PSU bank harbors. Is he??? Or Is he???
A mariner in the sense of his life long association with uncertainty and impermanence of his job always has this adhoc-ism in his life. Because of this factor he cannot actually bring himself to think of something of lasting value in his present or future. This is aptly clear from the numerous queries that we come across from people regarding how much would be sufficient for their retirement?
AND that is exactly the question that we intend to take up in this article.
HOW MUCH IS ENOUGH? And HOW are we going to ensure that we have it.
Finally the Mariner has realised that without Equity he has no chance of collecting enough money to fulfill the requirements of his dependents and his own. This realization is itself a big change in the mindset of thousands of Mariners- who so far never thought beyond the bank deposits and Real estate. To further ease his journey and adopt this equity into his planning, we found the new world of Mutual Funds where he could have his money managed by paying a minuscule fee . Mutual funds eased his burden and diversified his risk in two ways. By investing into a large number of companies and by taking away the decision of timing that investment. The SIPs and STPs objectified his decision of continuous investment which never happened before as his brain was always making him keep extra amount of cash in the bank waiting for some high-ticket expenses or an emergency. The STP allowed him to have his cake and eat it too – when required.
During this time, he also learned that since equity is risky he needs to keep some large percentage separately in Fixed Income or Debt funds. Fair enough it was necessary to keep something for contingency and risk!!!
Again, bringing back Neuroeconomics into picture- was this risk quantified? No, it was not quantified- simply a percentage of Asset allocation was adhered to.
Percentage? Why in percentage?
Is the duration of the risk to equity, known? Was it known that if the Stock market went down by half – how long will it stay there.
Was the quantum of risk known? i.e., was it known How much would he lose if the market went down at all.
In the Indian context, recorded history of stock market is about 40 years old. So can we on the basis of such a data actually draw any inference.
None of these questions can be answered affirmatively. So what can be attempted to is to discuss the asset allocation between Debt and Equity. Why? Because our GOAL should be only one- as a mariner-that our corpus should always outlast us!
I have recently received messages of concern that should they not go with conservative Hybrid funds which are considered safer or should they not have more than 50% in Debt in the final years of retirement.
I consider this is a very unwise step.
In my opinion the asset allocation of Debt: Equity as 70:30 or 75:25 as recommended by Financial Advisors is quite detrimental and goes against the whole life philosophy. The asset allocation ratio has been formed with random figures without any thought to the actual Corpus.
Why does a person have to settle for a ratio?
For safety!
Are the debt options safe?
Aren't the debt options subject to risk of continuously depleting interest rates.
One doesn't spend in terms of ratio but absolute numbers and sums of rupees.
Should a person having a Corpus of 2Cr and 4 Cr have same allocation to debt.
Again, should a person having 4 Cr and 10 Cr have same allocation .
I personally feel it all depends upon a person's lifestyle and family needs and dependents at the time of retirement. But it all boils down to reserve expenses for the number of months required.
Towards that I feel... Having more than 40-48 months of expenses is a waste to keep in debt avenues.
By short history of mutual funds in India, people have lost more in Debt than Equity funds.
Debt is an Avenue which is more translucent, if not opaque.
So how much you should have in debt...
For up to a Corpus of up to 1cr in retirement...90-100% ( If 1 cr is all that you have!)
For 2Cr- 90%
For 3Cr-75%
For 4cr-60%
For 5cr - 40%
For more than that 30- 20%
This corpus should never deplete!!! That should be your only goal.
If you don't want to use this suggestion...
Just ask your spouse and think together for yourself.
I feel unless the couple sits down together no financial plan will ever work.
Once you have read the above, you must sit down and think about your respective situation. Consider your age, marital status, check out your expenses for last 5 years , the goals to be achieved in before retirement.
Few days ago I had sent a call for review of franklin Templeton schemes .
Just before this call I had redeemed my entire holding of Franklin India US opportunities fund.
The date of transaction was 12th April. However , the funds did not come in the bank within T + 3 period as expected.
When I wrote back to the company after a week only then were they credited it to my account yesterday late evening.
I could have understood this delay and have normally moved ahead as I have in the past few instances with other AMCs. But what I wish to narrate to all of you is a disturbing incident regarding Internet transaction.
On the pretext of wrong password my account was locked and any attempt to reset the password was sending me back to a email address/ mobile number that I used 16 years ago . There was no connection with the present Folio which I had redeemed.
The idea of this post is to inform you about the pitfalls of internet transaction and importance of keeping your user id and password current.
I will suggest to all of you to following steps so that you do not face any surprises at the time of your redemption in case of necessity of funds.
1. Check your email from AMC from time to time .
2. Make test redemption of Rs.1000 now and then to be sure of the procedure and the time it takes for various class of funds to reflect in your bank.
3. Write down the user id and password of all your accounts in a notebook and keep the book safe.
4. Check your portfolio manager (wherever you maintain) with the SOA sent by the AMCs from time to time.
5. Don’t delete transaction messages and emails from your phone and pc.
6. Keep important messages and details on the cloud. Better to keep them in the same cloud as your IT and Bank documents.
7. Preferably keep one mobile and number dedicated to finances and do not load any app except of bank, stock trading account if you invest in stocks and AMCs.
8. Retain at least one annual SOA of bank, MFs on paper and keep it safe.
9. Complain to AMC of any non compliance freely, never hesitate.
I have been taking all the above steps already and hence am in a better position to face the amc.
In my view Franklin is on a shaky ground.
Regards
Rajeeve Kaushik
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