Asset Allocation | Portfolio Yoga

Real Estate vs Equities

Writing in Valueresearchonline, Aarati Krishnan says “Equity funds often do beat real estate, but it is all about behaviour and perception of investors”. I am not sure as to how many investors agree with that, but that is not the point.

In that article she correctly points out that while investors in Real Estate not only are willing to put in a bigger lumpsum but also keep paying EMI’s which are way bigger than what most equity fund SIP’s are. The affect of leverage also adds to the returns (especially since until recently, there was hardly any fall in prices).

But how correct is one to compare investing in real estate vs investing in mutual funds (equities). I for one believe that there are quite a few.

To start with, for most, investing in real estate means owning their own shelter. Of course, there are people who buy second / third or even fourth home, but for majority, one barely is able to see through one.

When one buys a home, he buys not with the intention that this shall provide him the money required for Retirement or for his Daughter’s Wedding or her Education. He buys for the simple reason that he believes that buying his own home not only is a viable and wonderful investment (that shall keep appreciating) but also a sign of prosperity and sign of success.

While in the older times, people waited till they nearly got to retirement age before many actually bought / constructed his house, over time, people have become more faster in acquiring a house regardless of whether he requires one immediately or not. After all, what is the whole point in waiting when its so easy to get loans and with prices that keep increasing, it seemed that waiting was a losing proposition.

The bigger question that the article raises is that if one made the same kind of investment in equities, one could have got similar / better return. But there is a catch and even the Author seems to agree with it when she says “people seldom take loans to make equity-fund investments (it’s not a great idea anyway)”

Much of the investment that goes into real estate is by way of Loans which can compound the returns even more. While the author does say “its not a great idea to invest on borrowed money”, its actually tough if you really wanted to do it since no banks will lend money for investing in stocks and shares. Also, unless you believe that the return from the investment is way higher than the interest cost, it makes no sense.

In fact, the very reason a lot of small investors are attracted to stock futures and options lies in its ability to provide massive returns if one is right for what is assumed to be a small risk.

Since unlike real estate, the very idea of investing in Equities is to achieve a goal, its actually important that you have a plan since there is no guarantee that markets will be where you would want them to be when the time comes to withdraw.

The draw-downs in Real Estate does not matter since the investment is not with the aim to reaching a specific goal. On the other hand, when you are investing in Equities with the understanding that this shall help in reaching one’s goals, its equally important to be able to time the market (on a broad level) since otherwise you may start at the worst point (to invest) and need the money in the best time (to invest).

While most advisors and fund managers harp upon SIP (Systematic Investment Plan), if you are investing for a Goal, do take into account that a plan of how you exit is also as important. After all, our needs will not match with market cycles and hence one needs to plan the same.

Its hence imperative that you have a proper asset allocation with multiple plans of action on how you shall deal with various stages of market and how they shall align with your goals. After all, what is the point in saving if it cannot come to use when one really requires the same.

Why Equity Funds Don’t Beat Real Estate

Its the Quantum that is Important

Real Estate has given some crazy returns in the last few years and there is not denying that. We can always pick and chose stocks that have maybe given even better returns, but the big question is, are they even comparable.

While there is always the case of stocks like Infosys / Wipro / Motherson Sumi, the net results if one looks at the Index itself is not as promising.

Even taking the most optimistic scenario that is used by most fund managers (investing in 1979), the returns come to some 17%. On the other hand, I know of properties that have (at current market prices) given a return of similar proportion for a much longer time.

But as usual, I am digressing from the subject on hand. On Twitter and elsewhere, I constantly hear about investors making 2x, 4x, 10x their investments in certain stocks.

The returns are fabulous if one were to put it, but the question is, is the return really worthwhile in money terms?

Let me give a example of my own. In 1997, I bought a certain company called Indo Count Industries. It was a penny stock at that point and remained one for a very long time. In fact, when markets collapsed in 2008 / 09, this stock traded at around 2.50.

Things started to change in 2013 and in 2014, this stock galloped 800%. This year, it has already gone up 80%. For me, this stock is near to a 100 bagger. Theoretically speaking, I should actually be able to retire on just this stock alone.

But as usual, there is a caveat. I invested 700 bucks (in 1997) and today while its worth 65,000, the sum is pretty low for thinking of any dream purchases, let alone retiring.

Lets assume instead of buying Indocount I had bought some real estate (of course, I could not get something for 700, so amount of investment would need to be higher) and it became a 100 bagger, I could actually have retired for a comfortable life.

The key difference is the amount of investment that is required / invested when it comes to the stock market vs the investment we do when we enter into real estate.

In Real estate, not only do we invest every Rupee we have got but actually leverage ourselves by taking on loans that magnify our returns.

When it comes to investing though, we rarely invest what we can (our Liquid Networth), let alone investing it all and then adding some leverage on top of it.

The key reason is the lack of conviction. While we are convinced that Real Estate markets shall not drown us, we aren’t so sure when it comes to the stock market.

The reason we aren’t convinced that stocks comes down to the fact that most of the time, we are clueless as to how to analyze companies / investment and even when we are, having either burnt our own hands or seen the destruction suffered by others, we worry too much about what if it goes wrong.

A friend of mine has a couple of crores in investment in real estate while having a couple of lakhs into the market. Even if his investment in the market doubles / quadruples, the returns are literally are literally a drop in the bucket so as to speak when compared to what the returns (a big IF) that are generated if his real estate investment doubles.

Of course, I am not advocating real estate. I strongly believe that while we may not see a crash of the kind we saw in US, the forward returns from Real Estate will be pretty low (and this even before Indexation) for the foreseeable future.

On the other hand, if India grows in the way countries like United States / South Korea / South East Nations / China have grown, there is a lot more to look forward to.

But you will only build wealth if you not only invest significantly but also be willing to stay through it through thick and thin. But that requires a lot of discipline since its not easy to stick to our process when the times are tough.

At PortfolioYoga, we introduced a Asset Allocator model sometime back. We believe that rather than invest everything when the markets are high, it makes sense to have a lower exposure and increase the exposure if market gets cheaper. Else, while returns will be lower than complete exposure shall provide, at the very least, you shall be able to sleep well at night.

Big money, both in markets as elsewhere, is made by those willing to bet it big. That of course does not mean take un-necessary risks. But with the right risk models, you should be able to build your wealth without having to go through the pain of having your investment stuck with no way to exit in a hurry as is the case with asset classes like Real Estate.

Atrocious Targets

Yesterday, a market analyst in a interview to CNBC claimed that Nifty was heading to 6750 based on his analysis of the Index. A few months back, another Analyst claimed that Nifty shall move way higher than what it was trading at that point of time. Going back further, I remember a Analyst mincing no words and being certain as hell that Nifty would reach a number that was last seen in 2009.

Other than these, there have been predictions of Sensex at 100,000 by Mark Galasiewski, editor of Elliott Wave International’s Asian Financial Forecast who gave a time line for the target to be achieved by 2024 (Link).

Dow Jones has also seen outlandish targets, the most bullish being Dow 40000 (Book link) to Dow going back to 1000 & even 400. And this target has been repeated since time immemorial so as to say (Link).

Over a long enough time frame, the only way markets can go is Up (unless the world goes into a never ending cycle of deflation) which means that no matter how high a target is seen, it is just a matter of time before the same is achieved.

But the key question is, are any of these prophecies actionable? And the simple answer is a even simpler No.

So, the question that comes up is, what is the need for these outlandish targets when they themselves know very much that its one thing to throw a random number as a target and quite another to be actually be able to take advantage of the same.

What I find is that most of these targets are bandied about by people who are happy to sell Tips / Newsletters while the real money managers generally prefer wiser counsel. Of course, the negative side of listening to fund managers is that you are always a perma-bull regardless of the state of the market.

While it makes sense to be bullish when valuations are cheap and attractive, once markets have moved way higher, there is need to be cautious and reduce the amount of exposure to the market. In fact, in a recent Interview, Hedge Fund manager Samir Arora said that 2015 was more of a Long / Short year (Link)

For a investor, shorting is not possible and hence the best alternative would be to have exposure that varies based on factors such as future growth and current valuation.

Our own Asset Allocation Model (Link) and our Model Portfolio’s (Link) are in a way designed for just that kind of thought process. We believe that even the lay investor can generate above market returns with simple strategies and without having to pay a leg and foot to fund managers who at end of the day aren’t any much wiser than us.

Introducing Portfolio Yoga – Asset Allocator

Re-balancing is a term that is rarely used in the investment advisory industry, let alone practiced with some amount of rigor. Re-balancing done rightly ensures that one is able to ride out the larger market cycles without just being a bystander to both the bull runs and the bear.

While it makes sense for a investor to have as much investment as his risk tolerance provides when the markets are moving higher, when the markets start to trend lower (and they do), it makes no sense to continue with the same allocation which can prove very detrimental to the health of the portfolio as the markets move lower and lower.

In one of my previous blog posts, I showcased how very good funds suffered draw-downs in excess of 50% when the markets collapsed in 2008. While the funds have recovered and posted new highs, at the lows when the logic at those times was to increase their exposure, data shows that investors actually exited, unable to bear the pain of such strong losses and fearing more loss if the markets continued to trend lower.

But what if a investor had exposed just 20% of his funds to the market compared to say 80%, would he be so concerned when the markets finally cracked?

A lot of sites provide a split on how much to invest into equity and how much into debt based on one’s risk tolerance. But that is a single dimensional approach since it does not look at the state of the market and whether even for the conservative investor, does it make sense to expose 40% of his funds to the market when its at its most expensive level.

At Portfolio Yoga, we are happy to introduce a simple way to calculate your asset allocation based both on your risk tolerance as well as the state of the market.

The PY-Asset Allocator will provide on a monthly basis, the split between debt and equity that is appropriate for the investor .Since the percentages can change on a monthly scale, the best way to implement would be via Nifty Bees since most mutual funds levy a high exit fee is the investment is unwound before a minimum amount of time (generally a year or more).

In the days and months that follow, we will also be implementing a simple questionnaire based process which shall enable you to assess the kind of investor / risk tolerance you have.

Here is the link for the page which shall be updated on a monthly basis. You can find the link on our home page http://www.portfolioyoga.com/ as well.

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