Out of the Box

I fail to see why retired people want to stay in Mumbai. 

No doubt it is a city with a very different culture than the rest of the country. An open and businesslike culture provides great opportunities to those who want to give their best shot. Over the years it has become a melting pot of the best talent from around the country descending on Mumbai and building institutions in all spheres of life which are recognized as leaders not only in India, but even in the rest of the world. But that is where all the good things end.

Somehow it is this characteristic and the fact that the planners could not envision the implication of this open culture has created a wave of negative effects on life in this city. Yesterday we met an expat friend who has been to Mumbai only one month ago, excitedly told us about taking his teen boys out for a safari today. The look on our face gave away what we felt of his idea and his next question was "There are animals there, aren't there?". This is probably the biggest negative for life in this city. No wonder there are Malls in Mumbai that have survived while they have a hard time in places like Ahmedabad, the so-called land of rising economy. Apart from no leisure activities, the roads, the public transportation system, the pollution, the weather, the rising cost of essential services make life extremely costly, if not difficult to live in Mumbai. And it is only getting worse. The new BMC taxes means that the maintenance bill for most of the dwellings (legal that is) will go up by almost twice. In some cases, they will go up by 3 times or four times or even more. It is probably the right place only for the ones who want to make a lot of money.

Given that a retired person is not making any income from any professional or business activity, one fails to understand why would you want to pay the unreasonably high municipal taxes from the income from your savings when you can live peacefully, in a nice clean environment in a B-town (like Pune or even village where one originated from) where the municipal taxes would be a fraction of that in Mumbai. 

Ideally, every retired person should try and ensure that they choose a location to live which maximizes the value they get for every penny that they spend. And paying the unreasonably high municipal taxes in mumbai or the costly services does not make any sense. Ideally a retired person should either rent or sell off the property in mumbai, take the capital and use part of it to buy a nice row house in a b-town or a village somewhere near their native place and enjoy the pollution free atmosphere during their sunset years. Invest the left over capital so that it beats inflation (I have provided some inputs in my earlier post Life @ 70 to do that) and use the income for purposes of going around the world or doing things that one always wanted to do but never had the time. Personally, I would move off to the hills when I am close to that stage in life when I don't have to be in a place like Mumbai to practice my talent and enjoy the serene beauty of nature and the weather that comes with being at a height when you are close to the equator.

And this is pretty much how senior citizens and retired people do in other developed countries. How many retired people have you heard off in America who live in New York or in London or in Frankfurt. They would all move away to distant suburbs (in case of Mumbai though there isn't one!) or quaint small little towns and spend the rest of their years in the peace and quiet of nature. If they have any property in New York or London or Frankfurt, they would probably rent it out and spend the rest of their retired life with a sense of financial security that the rent from it will always enable them to enjoy a quality of life that they have become used to. 

It is time our smart senior citizens and retired people thought "out of the box" and opted for a retirement plan that gave them the best "life" for money. 

Diary from Deutschland

It was a lazy Saturday afternoon. I and a couple of my colleagues from Net-Square walked in the nice warm sun on the banks of the river Main. We couldn't quite believe that we were in the heart of one of the major Financial centres in the world - Frankfurt. Just as we were taking in the beauty of the place, my phone rang. It was my nephew Jay. He stays close to Stuttgart and he was calling me to find out what was the right time for him to come down later that day to spend the rest of the weekend with us. 

We at Net-Square have this annual pilgrimage to Germany. This time around we decided to rent an apartment as we were going to be 4 of us getting in and out of Frankfurt from time to time, visiting different customers in other parts of Germany. And hiring an apartment was the right thing to do as that way we could come and go anytime of the day without bothering about check-in and check-out times. And surprisingly we got a great deal in the middle of the city - 5 mins walk from the central station for half of what we would have paid had we stayed in a hotel. But what was more surprising was that we paid less than what one would pay for an apartment in Mumbai 25 kms from the Center of the town! And that too in one of the busiest seasons in Frankfurt - the Expo month! When you come across such incidents, one wonders about the economics of the place called "Mumbai"! How long can it continue to defy Maths!

Getting back to Jay, what he told me next was really revealing. He said he wanted to confirm the time as he had to book a seat. For a minute I thought he meant a baby seat, but than quickly realized that can't be the case Jay was not married (he is a very good eligible bachelor). So I asked him again, "what do you need to book?" He said "I will be coming by car, sharing a lift and I need to book my seat". For a moment I didn't know if I heard that right. And he knew he had hit me with something I wasn't expecting so he smartly said "I will explain this to you when I meet you. See you at 8". Later that day, he introduced me to a great innovation called "carpooling on the go". Through the downturn in the economy (thought I can't say I saw any of that in Germany), Germans and other Europeans have come up with a innovative way to pay less, but stay mobile. People who travel from one place to another by car put up the empty seats in their car for sale. Yes, you read that right - getting paid to hitch hike somebody. And there is a web-site where drivers and passengers come together and book seats. And all this means that you travel at a fraction of a cost. What would have cost Jay 30 Euro to make the trip from Stuttgart to Frankfurt cost him less than 10. But what he told me later was even more amazing. Not only do people do this with spare seats in the car. They do this with spare seats on the train - yes, Train! and Bus! and Planes! 

German railways has many promotional fares. Many of them enable 5 people to get a special highly discounted rate for traveling together if they are doing so within a particular region. So if there are 2 or 3 people traveling together, they put up the rest of the seats up for sale. I had never heard of anything like this in my life. What an innovation! Jay again used it the next day while traveling from Heidelberg to Stuttgart. The site that Jay used is -> http://www.mitfahrgelegenheit.de/. 

If this was not enough, I was introduced to another novel concept a couple of days later called car2go. Well, it was not completely novel, but it is definitely pushing the envelope. When I was in US, I had used car sharing service like zipcar.com. It allowed individuals to hire car by the hour. Extremely useful if all one needed was a car for a few hours a week for either shopping or an odd errand. But this was hiring per hour. Through car2go, Daimler has taken this to another level with a hire per minute. Check it our here -> https://www.car2go.com.

If this was not enough to make sit up and respect the Greenness in all things German (and in a way European), I had other surprised waiting for me. One of them was the Green building - Commerzbank Tower. I was fortunate enough to have been given a guided tour of this amazing building by our customers. It is the tallest tower in Frankfurt and in Germany and the 2nd tallest building in Europe. But that is not the reason for its claim to fame. It is the fact that it is regarded as one of the best examples of a Green Building. There is some great technology in the building that uses natural ventilation and environmentally-friendly airconditioning to ensure it does not hog a lot of energy to provide heating and cooling requirements of its occupants. But I did not see Green Energy concepts only in the Commerzbank Tower. I saw it all over the country side. Through my trip I must have seen hundreds of windmills. In fact I learnt later that in the 1st half of 2012, 25% of electricity produced in Germany is from Renewable Energy like wind power, solar power and Bio-Gas.

I had been to Germany many times in the past, but what I saw this time truly amazed me. Everyone knows about the german precision, but what I saw this time convinced me that Germany stands tall among nations who can teach other nations how to live a Green Life. 

Whether it is the beautifully designed urban transport system or the locks on its rivers, which has allowed them to become one of the main pathways for economic activity or the work ethos, which provide the right work-life balance, somehow I came away more in awe of the German way of life. 

Dankeschön Deutschland

Financial Freedom @ 70

Today, I want to tell you a story. This story starts in September of 2005. I was called on by a gentleman to review his portfolio of investments. At the time this Gentleman (we will call him Mr. X) was 70 years old. At the time I didn’t know Mr. X very well. But when I reviewed his portfolio, I was pleasantly surprised. This man had almost 90% of his investments in equities. Yes, 90%! This portfolio was not built overnight but over the previous 30 years. And how did this affect his income profile. I found that besides pension that he and his wife got, the dividend received from his equity holdings more than adequately covered for his day-2-day requirements and in fact left a nice little kitty of saving that he could invest back. In fact the dividend he received was almost 70% of the amount of pension he received and it had been growing year after year at a pace of more than 17%. And this with a portfolio that was completely unscientific, had not been touched for more than 15 years and had in it some really worthless pieces of artifacts. When I questioned this Gentleman about how he had gone about building his portfolio, he mentioned quite non plussed, “I did not plan this. I used to do some basic research and keep investing in stocks in my time. All my savings would go there. And as years went by, it just seemed like the right thing to do.” I liked what he had done and being a Buffett follower myself, I recommended just removing some of the dead weight from the portfolio to both make it lighter to manage and also to make that money more productive by investing it in better business (yes, I don’t like the word stock). Why am I telling this story now? The reason is I wanted to test how this strategy would work out over time before I share this strategy more publicly. Though, over the years, I have shared this with people close to me. I call it bizarre financial planning as no financial planner will recommend such a strategy to a 50 year old, let alone a 70 year old. 

We are now almost at the end of 2012 and through the last 7 years, we have one whole  economic cycle play out. One of high growth between 2005 to 2008 and than a period of almost complete collapse from 2008-2010 and than a gradual rebuild from 2010 to 2012. The behavior of his portfolio over this period will be a testament to whether this kind of strategy can be planned for a person of 70+ years and maybe for people at lower age or maybe, as Mr. Buffett has done, for people of any age really.

In 2012 his portfolio is, yes hold your breath, 3 times what it was end of 2005. Yes, 3 times! In 2006, the dividend yield on Mr. X’s portfolio was 2% and considering the nos. this year so far that yield is still at 2%. While his pension income has just doubled, his dividend income has tripled providing him a very good cushion to take care of inflation and any unforeseen medical emergency. But too me this outcome was not surprising, I pretty much expected it. And there was nothing in that portfolio which was magical that caused it. In fact had he just been invested in Nifty also it would have grown by a little more than 2.5 times too. And some of the well known large cap equity funds would have also yielded a more than 3 times return.

Is it anything to do with the period during which he was invested in? The answer is yes. Because equity investments are highly volatile, you have to be in them with a long term perspective.  Comparing their returns over a short time frame will always give a lopsided view. Ideal period to review the performance is after two economic cycles. The best performance from equities comes when you let your holding compound earnings over a long period of times. That’s when they provide a multiplying factor to the original investment. Also markets tend to even out the technical fluctuations in its valuation and therefore measuring performance over a longer time period provides a better view of your equity investments. What Mr. X was sitting with in Sept 2005 was a portfolio built over a period of 25 years before that.

So can someone who is 70+ or 75+ today move to a portfolio profile matching that of Mr. X? Yes, it can be done. Obviously the financial profile of that person at the time of switch is very important. First, the individual should have a mediclaim of at least Rs. 4 lacs. Second, the total funds required for day-2-day expenses and a nice annual vacation (yes, if not now when else) should be about 5% of the total capital available for investment. That means at today’s values, you can have the kind of equity oriented portfolio that Mr. X has if you have a capital of Rs. 1 Crores plus. Out of Rs. 1 Crs, 75-85 lacs can take exposure to equity based on the market levels while the balance 15-25 lacs will provide the buffer to adjust the investment and remain in debt to provide regular monthly income. Third and probably the most important point. One doesn’t have to build an equity portfolio like Mr. X. Instead I strongly advise building a portfolio of equity funds. Equity Fund managers in India have now matured and are able to beat the benchmarks quite comfortably over longer time duration. Asset Management Companies have much more resources at their disposal to research and keep your money invested in the right business. Select 4 equity funds based on the advise of your MF advisor and than stay invested in them for a long time. If you have a good MF advisor, off and on he / she will evaluate the performance and let you know if you need to switch. Instead of dividend option, opt for a growth option and let your money keep compounding. Whenever required, dip into these funds, specially when the Markets are in a upbeat mood. With this strategy, over the next 10 years you will be the next Mr. X. Can those who have less capital adopt this profile? Yes, but in their case the solution will have to be customized and the math a little more complicated.

On the flip side if one continues managing the finances based on the traditional financial planning approach of matching investment in debt with age (ie 70% in debt if you are 70), one will be constantly fighting a losing battle against inflation, specially in an economy like that of India. To illustrate the point if Mr. X had 70% of his investment in debt, today the purchasing power of the regular income from that 70% would have been halved and how his growth would pan out in the future is amply illustrated in the graph no. 1 shown below. 

To conclude, life expectancy has increased several fold since Independence. The average life expectancy in India in some states is today 64 years and rising fast due to better health care facilities. As people stay on for a much older age the amount of years they have to spend after retirement has also grown from an average of 5 to 6 years to close to 20 years now. To be able to maintain a life style for 20 years after retirement, your wealth will have to continue to provide you income many times that you had during your retirement and that means your money will have to work harder both during your working life and after it. And that can happen only by owning smart business - which you can do only by having a substantial portion of your wealth in equity oriented mutual funds, if not direct equity.

Those who are still far away from 70, I would say..your time starts now!

- Hiren is also a Capital Markets expert and a registered Mutual Fund Advisor. And he can be reached at hs@1-thought.net or +91 98694 23839.