Making Your Money Work Just saving money isn't enough; you need to invest it wisely to ensure that inflation doesn't eat it away

According to the dictionary, income that is not spent is saving. If you don’t spend ten per cent of your monthly income and just keep the cash in a box, then you are saving money, no question about that. It’s a simple concept, but by itself, it doesn’t get you very far.

The basic reason for that is that money doesn’t retain its value. Prices rise and what was worth a hundred rupees last year is probably worth ten or twenty rupees more this year. Inflation eats away at your savings, bit by bit. Historically, inflation in India has always been at a far higher level than in the developed countries. Over the last thirty years, it has varied over a wide range, but has rarely fallen below five or six per cent per year for a sustained period. The long-term average over this entire period is about eight per cent.


Eight per cent doesn’t sound all that harmful. It just means that something worth R100 becomes R108. However, that’s the annual rate. The inflation rate is a compounding rate, and the inflation of one year feeds into that of the next year, and so on. This means that if you had saved R1 lakh in 1982 and just kept it in a drawer as cash all long, then it would be worth no more than R8,200 today, just 1/12th of its original value!

And don’t think that the future is going to be any better. Currently, despite all the efforts of the Reserve Bank, inflation has stayed above seven per cent. Economists now say that high inflation is now ‘structural’, meaning it’s integral to the Indian economy and will likely stay that way.

And that’s why we need to not just save, but also to invest our savings. Investment means putting our money into some form whereby it will yield some gains. Most of us are familiar with the ‘types of things’ that we can invest in. These ‘types of things’ could be property, gold, bank deposits, shares and deposits. Anything into which we can put in money and have it grow can be called an investment.

Of course, just matching inflation should not be the goal of any smart investor. Anyone who takes the trouble to learn some basics and applies them sensibly, should be able to earn more than enough to retain the value of their money. Investments can become an independent source of income. And if you let this sum accumulate instead of using it as income then it can grow into a serious amount of wealth.

Take the example above. Suppose that same R1 lakh had been invested in 1982 in the shares of a group of leading companies so that their value grew along the same rate as the BSE Sensex. The money would today have grown to R37 lakh! This is far ahead of the rate of inflation. A sum of R37 lakh can buy you a lot more than what R1 lakh could have bought you in 1982. Investing well over long periods of time will not just save you from inflation— it can also make you rich.

But investing can be as risky as it can be rewarding. Newcomers who start investing with over-optimistic expectations, and without enough knowledge or caution always face the biggest problems.

Asset Allocation Vs dividend reinvestment ?

Category	Asset Allocation	Dividend Growth Investing
Principal Long-Term Goal	Wealth	Income
Secondary Long-Term Goal(s)	Safety of principal -- Best risk-adjusted returns	Minimization of risk to income stream -- Wealth
Most Proponents Are…	Registered Investment Advisors and other investment professionals	Self-directed individual investors
Role of Investor	Passive	Active
Portfolio Building Blocks	Funds representing non-correlated asset classes	Dividend growth stocks
Theoretical Foundations and Supporting Data	Academic studies -- Peer-reviewed professional journals -- Back-testing	Personal experience, including multi-generational family experience -- Numerous non-academic studies -- Multi-decade performance record of dividend growth stocks
Pick Stocks?	No	Yes
Use Funds/ETFs?	Yes, usually exclusively	Not often
How Many Building Blocks in Typical Portfolio?	5-20	10-40
Role of Dividends	Minor-they add perhaps 1%-2% to total returns across entire portfolio.	Central-They provide the income which is the primary goal.
Role of "Value"	Moderate-Is one defining characteristic of a few stock asset classes.	Central-Purchasing at good valuations is part of due diligence process.
Ever Sell/Trade?	Yes, to rebalance. -- Yes, to change allocations based on changed life circumstances. -- Yes, if assumptions upon which plan was based change.	Yes, when a stock cuts its dividend or displays other warning signs of danger to dividend. -- Yes, when a stock balloons in value and profits can be redeployed to increase portfolio's yield.
Typical Views of Proponents	Only sensible goal of investing is to maximize risk-adjusted total returns. -- Individual investors are riddled with human flaws and therefore make bad investing decisions. -- Don't assume you can pick stocks successfully, because most investors can't. -- Most individual investors delude themselves about how well they are doing and don't know what their returns actually are. -- There is no timing involved. Rebalancing is not timing. -- Dividend growth portfolios take on too much risk, because they are exclusively made up of the asset class "stocks"	Main goal is sufficient and rising income, not total returns. -- Can tolerate capital declines, because they usually do not influence rising dividend streams. -- If you live off income in retirement, you cannot run out of money. -- Market declines provide buying opportunities. -- When market declines, I get "paid to wait."
Common Misconceptions about Each Approach	That asset allocation seeks alpha. Rather, goal is to replicate blended returns of "all" asset classes. -- That 2008 "proves" that the approach does not work.	That dividend growth investors seek alpha. Rather, they seek reliable growing income. -- That 2008 "proves" that the approach does not work. -- That dividend risk is correlated with stock market risk -- That all dividend growth investors allocate 100% of their assets to this method
Something that Really Frustrates "Other Side"	Refusal to post actual results, even of model or illustrative portfolios -- Name-calling -- Mocking, dismissive, or condescending attitude -- Apparent inability to see growing income as worthy objective or alternative to total returns -- Equating retirement with withdrawals	Swarming to answer questions or criticisms -- Questioning conventional wisdom -- Lack of academic/professional foundation for approach
How Ideally Finance Retirement?	Withdrawals: Selling assets without ever running out of assets to sell.	Collecting income and rarely or never having to sell assets.
How Can That Work?	If remaining assets expand in value to offset liquidations.	If income (from all sources) is enough to cover all retirement expenses.
Typical Stocks Held	Thousands (via funds). Few individual stocks are purchased.	Intel (INTC) Procter & Gamble (PG) Johnson & Johnson (JNJ)
Issues Within Approach	What truly is an asset class? -- How many asset classes are there? -- Should a portfolio contain any individual stocks or other instruments in addition to funds/ETFs?	Yield on cost-useful or useless metric? -- High yield, slow growth or low yield, high growth? Is that even a valid distinction? -- How many stocks are needed for sufficient diversification? -- What is a minimum useful yield?

The perils of European incrementalism

In his celebrated essay “The Stalemate Myth and the Quagmire Machine,” Daniel Ellsberg drew out the lesson regarding the Vietnam War that came out of the 8000 pages of the Pentagon Papers.  It was simply this:  Policymakers acted without illusion.  At every juncture they made the minimum commitments necessary to avoid imminent disaster—offering optimistic rhetoric but never taking steps that even they believed offered the prospect of decisive victory.  They were tragically caught in a kind of no man’s land—unable to reverse a course to which they had committed so much but also unable to generate the political will to take forward steps that gave any realistic prospect of success.  Ultimately, after years of needless suffering, their policy collapsed around them.

Much the same process has played out in Europe over the last two years.  At every stage from the first signs of trouble in Greece to the spread of problems to Portugal and Ireland, to the recognition of Greece’s inability to pay its debts in full, to the rise of debt spreads in Spain and Italy, the authorities have played out the quagmire machine.  They have done just enough beyond euro-orthodoxy to avoid an imminent collapse, but never enough to establish a sound foundation for a resumption of confidence. Perhaps inevitably, the gaps between emergency summits grow shorter and shorter.

The process has taken its toll on policymakers’ credibility.  As I warned European friends quite some time ago, authorities who assert in the face of all evidence that Greece can service on time 100 percent of its debts will have little credibility when they later assert that the fundamentals are sound in Spain and Italy, even if their view is a reasonable one.  After the spectacle of stress tests that treat assets where credit default swaps exceed 500 basis points as riskless, how can markets do otherwise than to ignore regulators assertions about the solvency of certain key financial institutions.

A continuation of the grudging incrementalism of the last two years risks catastrophe, as what was a task of defining the parameters of too big to fail becomes a challenge of figuring out what to do when key insolvent debtors are too large to save.  There are many differences between the environment today and the environment in the Fall of 2008 or any other historical moment.  But any student of recent financial history should know that breakdowns that seemed inconceivable at one moment can seem inevitable at the next.

To her very great credit, new IMF managing director Christine Lagarde has already pointed up the three principles any approach to Europe’s financial problems must respect.  First, Europe must work backwards from a vision of where its monetary system will be several years hence.  The reality is that politicians have for the last decade dismissed the widespread view among experienced monetary economists that multiple sovereigns budgeting and bank regulating independently will over time place unsustainable strains on a common currency.  The European Monetary Union has been a classic case of the late Rudiger Dornbusch’s dictum that “In economics, things take longer to happen than you think they will, and then they happen faster than you thought they could.”  So it has been with the buildup of pressures on the Euro system.

There can be no return to the pre-crisis status quo.  It is now clear that market discipline within monetary union is insufficiently potent and credible to assure sound finance, and equally apparent that when banks and sovereigns do not have access to lender of last resort financing the risk of self fulfilling confidence crises becomes substantial.  The respective responsibilities of the ECB, financial regulatory authorities and EU officials can be defined in different ways.  But there must simultaneously be an increase in the central financial commitment to the financial stability of member states and reduction in their financial autonomy if the common currency is to survive.

Second, the Managing Director is right to point up serious issues of inadequate capital in European banks.  Taking even relatively optimistic views about sovereign debt and growth prospects, European banks in at least as problematic a condition as American banks were in the summer of 2008.  Unfortunately in many cases they are far larger relative to their national economies.  Now is the time for realistic stress testing and then resorting to private capital markets if possible and to public capital infusions if necessary.  With delay, private capital markets will close completely and nervous managements will rein in the provision of credit just when credit contraction is most likely to damage real economic prospects.

Third, like her predecessor, Ms. Lagarde has broken with IMF orthodoxy in recognizing that expansionary policies are necessary in the face of substantial economic slack.  The oxymoronic doctrine of expansionary fiscal contraction is being discredited every month.  Europe needs a growth strategy.  Yes, almost everywhere and certainly in the most indebted countries, binding commitments to eventual deficit reductions are a necessity.  And in some places credibility has been lost to the point where immediate actions are necessary.  But Europe only has a chance of handling its debts and contributing to a stronger global economy if it grows.  This will require both aggregate fiscal and monetary expansion.

This last point is an essential lesson of recent American experience.  Even though credit spreads and equity values had normalized by the end of 2009 and the financial system was again functioning reasonably normally a year after the 2008 panic, lack of demand has continued to constrain growth.  While any one household or one nation can improve its balance sheet by saving more and spending less, the effort by all to cut back means reduced incomes and ultimately less saving for all.  Germany in particular needs to recognize that if other European nations are going to borrow less, then it will be able to lend less and that as a matter of arithmetic this will mean a smaller trade surplus.

The world’s Finance Ministers and Central Bank Governors will gather in Washington this weekend for their annual meetings.  The meetings will have been a failure if a clearer way forward for Europe does not emerge.   Remarkably, the European authorities that drove Ms. Legarde’s selection just 3 months ago have rejected important components of her analysis.  In normal circumstances comity would require deference by others to European authorities on the resolution of European problems.  Now when these problems have the potential to disrupt growth around the world all nations have an obligation to insist that Europe find a viable way forward.

Failure would be yet another example of what Churchill called “want of foresight, unwillingness to act when action would be simple and effective, lack of clear thinking, confusion of counsel until the emergency comes, until self preservation strikes its jarring gong–these are features which constitute the endless repetition of history.”

Now what to do with ONGC future short?

carry forward your position till issue come

What Next for Greece and for Europe?

Uncertainty about potential loan losses in Europe continues to roil markets around the world. For many investors, taxpayers and ordinary people there is no clarity on the exact current situation — let alone a consensus on what could happen next.The news on Wednesday was relatively good, but the situation remains precarious.
What should any friends of Europe — the United States, the Group of 20, theInternational Monetary Fund, perhaps even China — strongly suggest the Europeans do?

A good start would involve being honest on four points. There is nothing pleasant about the truth in such crisis situations, but denial is increasingly dangerous to all involved.


Uncertainty about potential loan losses in Europe continues to roil markets around the world. For many investors, taxpayers and ordinary people there is no clarity on the exact current situation — let alone a consensus on what could happen next.The news on Wednesday was relatively good, but the situation remains precarious.



What should any friends of Europe — the United States, the Group of 20, theInternational Monetary Fund, perhaps even China — strongly suggest the Europeans do?Greece is on the front burner. Currently on offer is a debt swap for private-sector lenders that, once it goes through, will effectively guarantee 33 cents for every euro in bonds that they currently hold. That downside protection is attractive to banks — because they will get hard collateral in the restructured deal. (Greece would buy the bonds of safe European countries, like Germany, and hold them where creditors could get at them.)

The first brutal truth is that this is a default by Greece, and all attempts to deny this or use another word just muddy the waters.

Greece can probably afford to service debt restructured to this level — although that will depend also on the final terms of European Union and International Monetary Fund support. But the second truth is that this is a wasted opportunity for Greece, because it does not put Greece’s debt problems behind it; most likely, it will be back to ask for further reductions in principal in the future.

The ice has been broken: the European Union has agreed that a euro-zone member can default. Greece should now go all the way — aiming to end up with new bonds that have grace periods of three years on interest and 10 years on principal.

The third truth — and the most difficult for many to stomach — is that in the context of any such deeper debt restructuring, the Greeks should cut public-sector wages across the board and bring down other spending to make Greece’s budget deficit much smaller immediately.

Greece and the monetary fund need to assume another recession in 2012 and no growth for five years. They should aim to balance Greece’s primary budget on a cash basis in 2012 (since there would be no interest due, this would also mean they need no cash from any kind of lender). In this scenario, the new bonds could be collateralized with state property.

There is nothing particularly fair or just about this set of outcomes. Everyone in Greece is already hurt by the consequences of excessive spending, big deficits and reckless lending (to the government) in the past.

But what are the alternatives? If Greece adopts some version of this deeper debt-restructuring approach, it can stay in the euro zone and find its way back to growth (assuming the world economy does not go down again sharply). Its private sector will eventually rebound.

In contrast, if Greece were to leave the euro zone, its financial system would cease to operate; Greek banks depend to a great extent on support from theEuropean Central Bank (for more background and the available numbers, see our recent Peterson Institute policy brief, “Europe on the Brink”). Do not try to run any modern economy on a purely cash basis; the further fall in gross domestic product would be enormous.

If Greece pays its debts at the currently proposed level (33 cents on the euro), it will struggle to grow. The tax revenue needed to service that debt would burden businesses and households for decades — enterprising and productive people will move their fortunes and their futures elsewhere in the euro area or to the United States.

The fourth and most dangerous truth is that Italy and Germany are not ready for the next stage of the euro crisis.

Any further adverse developments in Greece will precipitate a run on Italy — involving investors selling Italian government debt. The European Central Bank is currently prepared to buy Italian bonds, to keep interest rates below 6 percent.

The Germans are obviously very worried by this approach — hence the resignation last week of Jürgen Stark, the senior German representative in the European Central Bank management. He has been replaced by someone who is likely to take an even tougher line on bond buying.

Aside from the politics, the risk is that the euro loses credibility and falls steeply in value. The European Central Bank thinks it can “sterilize” any bond-buying by selling its own bonds into the market; this would mean no net increase in the supply of money (just fewer Italian bonds and more E.C.B. bonds held by the private sector).

As a technical matter and in the short term, the E.C.B. may be right. But the central bank is taking on a lot of credit risk. If a big country defaults, the bank would need to ask member governments to provide it with more capital, and this is the kind of transparent fiscal hit that politicians hate.

And if E.C.B. financial support is truly unconditional, this just encourages countries to be less careful about their fiscal deficits. “Fiscal dominance” — meaning a central bank always buys up government bonds to keep interest rates down — is a recipe for big inflation.

Expect a great deal of shouting behind the scenes at the highest level in Frankfurt (where the European Central Bank has its headquarters) and in European capitals. Instability seems unavoidable. Significant inflation may follow, although first we will see serious recessions in the troubled European periphery, a ratcheting up of bond buying and repeated political crises.

Liquidity Bailouts And Hong Kong Rumors Reflect Shift To New Monetary Order

The news of a global liquidity bailout -- in which central banks worked together to add US dollar liquidity to help the European banking system -- has helped drive the US dollar much weaker and the Euro stronger in the foreign exchange markets over the past 24 hours. This event is noteworthy because it reveals the simple truth that the entire Western banking and financial system is in an ongoing and overdue process of self-destruction -- an inevitability brought about by its being built atop a debt money standard (in which all money is loaned into existence). As the US dollar and Treasury bond markets are the foundation of this system, it is their collapse that is the big picture driving the global economy. From this perspective, some type of US dollar asset is the asset most worth shorting, with gold being the most worth being long. Indeed, when one examines price movement over the past 10 years, long gold/short US dollar has been one of the best trades one could have made.

As this process is still unfolding, it is the US dollar that will be more debased than any other currency. Accordingly, the primary trend in EURUSD should be bullish. While we have had some significant retracements in the EURUSD exchange rate, we still have not had a monthly close below the 50% retracement of the move from around .8400 to over 1.5800 -- the move from the Euro's inception in 1999 to its all-time high in the summer of 2008.

Yesterday we also got another example of opportunities that may emerge from this big picture transition away from the US dollar as reserve currency. Hedge fund manager Bill Ackman gained headlines for his decision to go long the Hong Kong dollar, on the premise that Hong Kong will sever its peg to the US dollar. Severing of pegs to the US dollar by Asian economies -- specifically satellite economies of China -- is an event symptomatic of the ongoing move to a new global monetary system, in which the US dollar is no longer a primary reserve asset. Western central banks will increasingly peg their currencies and resist free market chaos in the name of preserving stability, while East Asian economies centered around China will increasingly embrace free market principles to assist in their transition to consumption and finance-oriented economies.

Of course, the best and safest opportunity during this transitional time is in gold. 

investment planing is most important thing in everyone's life

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what investment meant to you?

think about it and write yout thought on blank paper

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