Using credit card rewards to increase emergency corpus

I am scared of inflation. Not just ‘aware’ of inflation and plan with inflation in mind. I am really scared of purchasing power eroding due to inflation. This fear influences all my financial plans.

I have set aside some liquid investment as my emergency fund, to manage unexpected expenses. Because I am always afraid of inflation, I have set a goal of increasing the emergency corpus by 10% every year. While having a growing corpus is reassuring, it’s not easy to add to your corpus every year. I don’t have a plan for how to fund this increase.

I got an idea last week. I use cash back credit cards that give me some cash regularly. The reward shows up as credit on the card statement, but it’s cash nonetheless. From this month on, I am going to move that money into my emergency corpus. That will not be sufficient for the target increase of 10%, but every little bit helps.

In a way, credit card cash back rewards spending. The more we spend, the more the reward is. I am taking away this “free money” from my spending budget over to my emergency corpus. I somehow feel like this is a better habit than unconsciously spending the cash back rewards.

Confused about investing in a bull market (or a bear market)?

Many years ago, I watched a video on riding motorbikes. That video said that a rider should always be willing to fall. They didn’t say the rider should want to fall, because no one wants to fall. Rather the rider should be willing to fall because falling off a motorcycle is a question of when, and not a question of if.

The same advice is appropriate for investing too.

If you’re investing in the share market, you should be willing to lose money. Notice that I am not saying you should want to lose money, because no one really wants to lose money. Rather, you should be willing to lose money. That means being prepared for when the investment does inevitably go down in value.

Image source: pixabay.com

Today we are in the middle of a raging bull market, and the price of equities is going up almost on a daily basis. What is the narrative that we hear in the media? “The market is overheated.” “The market is expensive.” “The valuations are too high.” We often hear advice to not invest large sums into equity now because the bull run can end any day. That sure sounds like sensible advice.

I haven’t witnessed a bear market yet, but I can imagine what the narrative will be in a bear market. “Don’t invest large sums into equity now because we don’t know how much further the market will fall.” “If you wait a few days/weeks/months, you can get more shares for the same money; why invest now?” Again the same advice despite the inverted market trend.

Thinking critically will reveal to us that waiting with liquid cash runs counter to the more fundamental investing advice: “don’t try to time the market, because it’s a very very hard thing to do.”

But what’s wrong with waiting? We all like a good deal, and why not wait for a bit if you can get the same asset for a better price tomorrow? Because we don’t know when we’ll get that better deal or if a better deal will ever come at all. Waiting for a better deal is actually predicting the future. Predicting the future can be a fun exercise, but do you want to bet your money on such predictions?

If you have the money today, invest it today; don’t wait for a better time that may or may not arrive. Rain or shine, continue your SIP, because the best time to invest is when you have the money to invest. Rather than trying to find the right time to enter or exit based on market conditions, spend your energy in finding the ideal asset allocation for you so that you are systemically buying low and selling high without taking too much (or too little) risk.

Index vs value investing

I came across this tweet yesterday, and I think this highlights an advantage of index investing.

In mid 2000s, NTPC came out with an IPO at 72 per share. I applied & was allotted 200 shares.
I sold them within 2-3 years of listing at 145 per share.
In last 15 years the stocks has been stuck in a range between 70 and 150

— Arvind Datta (@datta_arvind) August 21, 2021

When seen with the context of inflation, NTPC is just losing money. Losing money through such a stock is a risk an index investor systemically avoids. A value investor might hold onto NTPC hoping that the price will eventually go up. It’ll be baffling to such an investor that you’d sell off a company just because it’s stopped satisfying an arbitrary requirement. (Other than whole market indices, everything else, including Nifty 50, Sensex, and S&P 500, pick an arbitrary number of companies.)

It’s possible that a company is kicked out of the Nifty 50 index today, but joins the index again a few years later at a higher valuation. A value investor that holds onto such a company throughout the journey will be satisfied at the end. But an index investor will be selling when the company leaves the index and buying again at a higher price when the same company rejoins the index. An index investor should be comfortable with such a turn of events.

Corollary: If you are an index investor but you cannot stomach buying expensive stocks, you should reconsider your investing style. Maybe you are a value investor in your heart, but you’re investing in indices because that’s more fashionable.

PS: Investing in whole market indices does not remove this risk. I am only considering indices that pick top N companies by market cap. Vast majority of index investors in India invest in such a “top N” indices.

PPS: To be 100% clear: I don’t know anything about NTPC; I don’t even know the full name of the company. I am not claiming that NTPC is a value stock. I am only talking about a hypothetical investor who thinks NTPC is a value pick.

There’s an upside to online classes

One of the things that I learnt a long time ago was that positives and negatives are always mixed together. No such thing that’s entirely positive; no such that that’s entirely negative.

Children having to stay home and go to online classes is challenging for the most part. But it also has a benefit. Watching your children be part of a classroom is such a heart-melting experience. In a classroom setting, children act differently than they’d with their parents. Seeing this other side of their children, I think, would be a heart-melting experience to many parents.

Image source: PixaHive.com

Can I keep some money aside to invest during market crashes?

I was having a chat with a friend about having some money set aside for “buying the dip” when there is a sudden market crash. This conversation allowed me to think deeper about this idea and made me realise that keeping such a corpus is nothing but FOMO (fear of missing out) pretending like a legitimate investment idea.

Image source: pxfuel.com

The downside to having an “opportunistic investment” corpus

• It’s not clear what a “dip” even means, for someone to buy the dip. Let’s say you set aside some money in 2021 for “buying the dip”. In 2026, let’s say the market falls by 15%. Should you buy this dip? If you had invested this money in equity in 2021 itself, your corpus will likely be worth more even after a 15% fall! Should you buy this 15% dip or should you wait for a harder fall?
• Inferring from the previous point, you are actually giving up real gains today for speculative gains in the future. You keep the money liquid and earn low returns with the hope that some day the market will fall very badly. Are you okay with this opportunity loss?
• Let’s say you see the market fall drastically, say by 40%. You go all-in and deploy your entire opportunistic investment corpus in equity. Now, are you sure that the market won’t fall another 25% after you have invested? Opportunistic entry requires knowing where the bottom is (which is unknowable in advance).
• How would you know how long you need to wait before your opportunistic investments give a big yield? When do you pull out and replenish your opportunistic investment corpus so you can be prepared for the next crash? Opportunistic exit requires knowing where the peak is (which is, again, unknowable in advance).

What can you do with excess cash then?

Let’s say you have fulfilled all your goal-based investment targets, but you still have some money left. What can you do with that money? Like everything in personal finance, there is no right or wrong answer here. I’ll go over what I’d personally do, and that might give you some ideas.

1. To make the goal plans more robust, increase expected inflation. If I have assumed an inflation rate of 6%, maybe I can change it to 6.5% or 7%, just to be on the safer side.
2. If it makes sense, increase the goal budget so we can afford a bigger car, a more expensive college education, or a more exotic vacation.
3. If I still have money left over, I’d pick an asset allocation suitable for idle investments. This “idle corpus” is invested based on my risk appetite: a part of the corpus will be in stable investments so I can take the money out if needed; the rest will be in growth assets such as equity.

That’s my strategy. Does this mean I might never buy the dip when there is a crash? To the contrary, I’ll be better positioned to buy the dip than those who are waiting with liquid cash.

Whenever there is a dip or a rally, the asset allocation will get skewed. I’ll know exactly how much money to spend on buying the dips or exactly how much profit to book. If the market continues to fall for years, I’ll continue to buy the dips because the asset allocation keeps changing and more equity is needed to reset it. Likewise, if the market continues to rally for years, I can continue to book profits.

So the bottom line is that if you can pick a target asset allocation that you’re comfortable with, regular rebalancing is all you need to take advantage of market fluctuations. Just make a plan and stick to it.

Picking the right asset allocation is actually very hard. The right asset allocation should remove your worries about excessive loss. At the same time, it should also remove your worries about missing opportunities to buy the dips. Spend your time and energy in figuring out where your sweet spot is. That’ll make you richer and happier than most other investment tactics.