Sunday, 5 July 2015

Multiply Networth 6X in 6 Years

First of all I apologize for the rather obvious eyeball grabbing title of this post.  But hey I do have the data to back it up so maybe it is not too bad after all!  

Well this is a follow-on post to the one I had done about a month ago about growing networth.  That post basically talked about some data points pulled out over the last 6 years detailing the growth of my networth.  As I clarified in my post earlier, this was not meant to be any indicator of portfolio performance, but merely my attempt to track one of the key indicators in my journey to financial independence and early retirement.  The key reason I track my networth is to be able to understand the dynamics of personal portfolio management, and how to improve the management over time.  In some sense you are the fund manager of your own personal networth (which is your own personal AUM), and you are constantly looking for ways to manage it better and nurture it to reduce volatility, and improve growth rates, consistently year over year.  

So here is some comparative data for investment growth over the 6 year period from mid 2009 to mid 2015.  This is the same period that is covered in the post that I had return before, and I have reproduced the networth plot below here just for convenience.  

Please read the previous post for details and specifics related to the graph above.  In this post I want to focus more on how this growth was achieved.  Now I have said many times before in my blog posts, that I am a huge believer in the power of equity investments, and in some sense, I am betting a large part of my early retirement goals on the performance of the Indian stock markets.  Clearly the growth in my portfolio over the last 6 years should be closely linked to the behavior of the Indian stock markets, since I have a very large percentage of my assets allocated to equities (over 75% at last count)  

Interestingly enough, the Indian stock markets did very poorly over a large stretch of the 6 year period I am describing above.  Only in the 2014 timeframe, did the markets zoom up based on the NAMO effect.  Prior to that for a very long stretch of time, the markets did hardly anything and returns were not particularly encouraging.  In fact I wrote a post towards the end of 2013 lamenting the 6 Sideways Years of the SENSEX.  Little did I know that the market would pick up steam like crazy in 2014! However, I never blinked right through those disappointing 6 years, and kept up the rate of investment, and in fact even increased it, as I waited for the hopefully inevitable growth of the Indian economy, and the resultant stock market gains.  As you can see in the graph above, the real returns started kicking in from late 2013, and began to hit the roof only in 2014.  The first half of the graph above is downright disappointing in comparison.  Mind you that 6 years is a very short time to draw any conclusions regarding stock index performance.  I am simply stating facts here that are accurate for this particular 6 year period.  It is anyone's guess if it can be extrapolated to future 6 year periods.  

Now let me start by bench-marking performance to a few different investment avenues available to the average retail investor.  I typically use Kisan Vikas Patra (KVP) as the baseline performance metric, and a proxy for safe ultra-reliable and guaranteed investments, like FDs, RDs, savings accounts, debt funds, etc.  KVP guarantees that it will double your money in 100 months (8 years and 4 months).  This is a CAGR of 8.7%.  Basically if your networth grew at 8.7% per year, then it would have doubled in line with the KVP in 8.3 years.  Now since we are discussing a 6 year period, we need a CAGR of 12.2% per year to get the same doubling effect.  In our high inflation, high interest rate scenarios of the last 6 years, it is not impossible to get this level of CAGR from pure debt instruments.  However, you should be cognizant of tax issues when dealing with debt funds.  Poor allocation methods focusing on tax inefficient strategies like FDs would not get you anywhere near this kind of return post-tax.  Please remember as far as your networth is concerned all computations need to be inclusive of the impact of taxes, since only the monies left in your hands count towards your corpus!  But bottomline, it is hard to imagine a pure debt focused portfolio getting more that a doubling effect on your networth.  You need much more oomph! in your asset allocation to drive real growth in wealth.

Next lets look at a 100% equity portfolio that is indexed to the NIFTY.  This is very easy to construct by putting all your money into an ETF that mimics the NIFTY, like the NIFTYBEES for example. Here is how the NIFTY has done over the same 6 year period from mid 2009 to mid 2015.

The NIFTY has been incredibly volatile over the last 6 years, with highs of 30%+ returns and lows of approx 25% losses.  Overall the NIFTY has delivered 2.09X growth in these 6 years, which is not much more than the 2X calculation we did earlier with a CAGR of 12.2%.  2.09X growth over 6 years is a CAGR of 13.1%.  I'd wager there are ways to get similar 13.1% annualized returns from a very intelligently managed pure debt portfolio too!

However, in the Indian context, any savvy investor will tell you that though the NIFTY represents the overall stock market performance, it is possible to handily beat it, by a simple strategy of picking high quality Mutual Funds, and sticking with them.  Indian fund managers seem to have the ability to beat the NIFTY index at will (or atleast the good ones seem to do this year on year).  I have discussed before that HDFC PRUDENCE is my mutual fund of choice over several years now, and a large portion of my equity investments are routed through this fund.  In fact I had blogged about this as recently as March this year in Building Wealth One SIP at a Time, extolling the virtues of investing in this balanced equity oriented fund offering from HDFC.  Here is how the prudence fund has done as represented by the growth NAV in the table below.

Comparing the results for HDFC PRUDENCE vs NIFTY from the table above, you can see that the prudence fund has typically beaten the index in up years by ~6% points, and in the boom year of 2014 by as much as 19%.  It has also done well in down years like 2011, limiting the downside by 8% when compared to the index.  2013 seems to have been a bad year for the prudence fund when it lagged the index by 6%.  The summary is a 2.73X multiplier effect by staying 100% in the prudence fund from mid 2009 to mid 2015, an impressive market beating CAGR of 18.2% over this particular period.

Clearly you can see the power of equity investing in a period that has seen high volatility, and a sustained region of mediocre to flat results, followed by an accelerated boom period.  However this still only gets us to a 2.73X multiplier and nowhere near the 6X+ that I got on my networth.  The secret is rather simple, which is the additional monies that I have pumped into my investments over this 6 year period.  Like I mentioned before, even though the markets were disappointing upto 2013, I kept up my investment pace right through those long dark years from 2008 to 2013.  Over the 6 year period I was able double my corpus simply through savings.  Basically I managed to save the same amount in the 6 years from mid-2009 to mid-2013 as I had when I started in mid-2009.  This was primarily driven by living well within our means, and is probably interesting enough to merit a separate post regarding our experience in making this happen.  Suffice it for this discussion that I got a 2X multiplier simply from savings over the last 6 years.  

The 2X from savings coupled with 2.73X from prudence gets us to 5.46X, which is now approaching the 6X+ gains that I got in my overall networth.  The remaining gains were made by the growth in the savings from the last 6 years.  Since I am in the accumulation phase of my retirement journey, every single penny saved, is further invested aggressively in a high growth equity oriented portfolio.  The remaining gap from 5.46X to the actual returns in my corpus are simply the gains achieved by these savings in turn growing through the duration of this period in the form of SIPs, and additional investments in direct equities.  

So here is the summary in the form of a bar chart graph for easy visualization.  

The left most bar shows the scenario if I had chosen to invest my entire starting corpus in a safe guaranteed return asset like KVP.  My returns in 6 years would have been less than 2X (not taking taxes into account)  The second bar represents a pure debt scenario that I have described before in this article delivering 12.2% CAGR.  Again like I mentioned before watch out for taxes in this scenario too!  The third bar represents a 100% NIFTYBEES ETF investment. Taxes are much simpler in long term equity oriented schemes, basically ZERO for LTCG!, so this bar does take take into account, and is a real representation of potential corpus growth.  The fourth bar represents a 100% investment in HDFC PRUDENCE, again with ZERO taxes comprehended.  The final bar is the actual return in my portfolio, split into the various components for easy visualization.  Note the equity gains from the original corpus taking the overall total to an impressive 2.73X.  Then there are additional savings getting invested back into the same high growth equity oriented strategy.  And a final topping coming from the growth of those additional savings completing the totem pole of my final corpus across 6 years of saving and investing as aggressively as I possibly could. 

This has been a dream run so far, and I am not too sure if it can be repeated over the next 6 year period.  However, I am keeping my fingers crossed, saving as hard as ever, and hoping my investment strategies are supported by a rocking Indian macro-economy.  Hopeful as ever!  Happy investing!

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