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Last Updated : Nov 28, 2019 03:25 PM IST | Source: Moneycontrol.com

Double Your Income series: How tracking the market helps

The higher returns are mostly accompanied with higher risks. This is why you need a counterbalancing force. In other words, you need the stability of large caps even if it comes at the expense of slightly lower returns.

Rahul Shah @moneycontrolcom
Representative image
Representative image

In my last two articles, I explained how two giants of the investing world – Benjamin Graham and Warren Buffett – helped me build my double income investing system.

But the picture was incomplete without the insights of third and final guru – Jack Bogle.

You see in Double Income, I am going to be recommending mostly mid and small caps.

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This is a boon as well as bane. A boon because mid and small caps usually provide greater returns than large caps. They give you that extra edge.

But it is also a bane.

The higher returns are mostly accompanied with higher risks. This is why you need a counterbalancing force. In other words, you need the stability of large caps even if it comes at the expense of slightly lower returns.

And this is exactly what I intend to do with the final 20 percent to 35 percent allocation in my Double Income Map.

When the broader market will appear to be attractively valued, the allocation to stocks will go to as high as 80 percent out of which, 20 percent will be invested in large caps.

And when the markets turn expensive, stocks will account for only 60 percent, 35 percent of which will be allocated to large caps.

Well, there's a small twist here. Rather than pick the large caps ourselves, I will recommend a Nifty index fund.

This is a move that's been inspired by the legendary Jack Bogle.

Bogle believes the odds are heavily stacked against an investor whose goal is to earn market beating returns. This is even more difficult in the case of large caps.

In fact, he has created an entire multi-trillion-dollar industry based on this principle. Not to forget the high praise he received from Warren Buffett. This is what Buffett once said about Bogle.

If a statue is ever erected to honor the person who has done the most for American investors, the hands down choice should be Jack Bogle. For decades, Jack has urged investors to invest in ultra-low-cost index funds. In his crusade, he amassed only a tiny percentage of the wealth that has typically flowed to managers who have promised their investors large rewards while delivering them nothing – or, as in our bet, less than nothing – of added value.

Indeed.

Bogle revolutionised investing and argued there is no point in looking for a needle in a haystack. His advice was to buy the entire haystack.

And this is precisely what we are going to do to the large cap component of our Double Income Map. Instead of recommending a few large caps, we are going to recommend a low-cost index fund.

Luckily for us, the proliferation of these funds in the last few years gives us plenty of options to choose from.

I believe a low-cost index fund will be a vital cog in my double income strategy. After all, the stock market has returned close to 15 percent to 16 percent per annum over the long-term.

Thus, if history repeats itself, these returns could be ours for the taking unless there’s some major goof up at our end.

Worth highlighting that implementation will be the key here. The Double Income strategy is sound in my view.

If followed with discipline, it can serve an investor for a long time to come.

 

(This post is a joint initiative between Moneycontrol and Equity Master. Rahul Shah is Equitymaster’s Co-head of Research. He has more than 16 years’ experience in equity research and building investing systems.)

Disclaimer: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. This Article is for information purposes and is not providing any professional/investment advice through it and Equitymaster disclaims warranty of any kind, whether express or implied, as to any matter/content contained in this Article, including without limitation the implied warranties of merchantability and fitness for a particular purpose. Information contained in this Article is believed to be reliable but Equitymaster does not warrant its completeness or accuracy. Equitymaster will not be responsible for any loss or liability incurred by the reader as a consequence of his taking any investment decisions based on the contents of this Article. The reader must make his own investment decisions based on his specific investment objective and financial position and using such independent advisors as he believes necessary.
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First Published on Nov 28, 2019 02:17 pm
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