All of sudden the dollar has become Mogambo for the investment market as both Equity and Debt markets have become very volatile. News channels have shifted their bases in coffins, and have started using terms like “bloodbath”, “butchered” and “bankruptcy”. Are you also disturbed? If your answer is Yes or May-be-little types, this article is for you. Yes your fear of investments turning into negative returns and panic is understandable but not justified if you have set your goals and believe in your financial plan. And the challenge to control your emotions, to stay away from panicking and taking impulse decision regarding your portfolio has come now. And it is not so hard if you believe in basics.
Image courtesy of KROMKRATHOG at FreeDigitalPhotos.net
This article is part of EQUITY Series – that I started last week. This post is inspired from Nick Murray – he is financial advisor’s coach, based in US. My firms name (Ark) is also inspired by one of the books written by Nick Murray.
Superior Lifetime Returns
First we have to understand “Superior Lifetime Returns” – it’s not the highest return in the cosmos but return that is required to achieve goals with minimum time, effort & stress. If you stick with these principles & practices – they will account for 90% of your investment success. So goal is never to earn the “maximum return” or “be in safe zone returns”. So here are the 3 Principals and the 3 Practices:
First and foremost principle is Faith – if you have “faith in the future” nothing else matters and if you don’t have “faith in the future” nothing else matter. You have to understand that there is difference between HOPE & FAITH. Hope is the state which promotes the desire of positive outcomes related to events and circumstances in one’s life or in the world at large. But we don’t have proofs for hope but faith is based on historical data and facts. So you have Hope from your kids and not Faith. Last week I shared some data to restore investor’s confidence but our media can shake confidence of anyone. Currently media is comparing current situation with 1991 crisis, and they may be right but in the same period our index has gone up by 16 times or CAGR of 13.5%. Read: Indian Equities – Past, Present & Future
Warren Buffett said “The Stock Market is a highly effective mechanism for the transfer of wealth from the impatient to the patient.” Even who don’t lose faith easily lose patience based on current situation. Most of people focus more on breaking news than their goals. Even the long term investor will say, let me right now shift to debt till the things improve but he should remember, now he is taking responsibility and stress of being right TWICE – one at the time of exiting present investments & then to enter at the right time again. So now focus is shifting to “Timing the Market” – which is undoubtedly worst strategy for retail investor. Read: Secret of Achieving High Returns.
One study suggests, more changes you will make in your portfolio, lesser will be the returns – another study suggests more often you look at your portfolio, lower the returns. So what one should do?? Read 3 practices that are given in second part of this post & stick with them.
Patience will help in not doing wrong things and Discipline will help in keep doing right things. Not far back, Indian investors learned benefits “Systematic Investment Plan” but now I realize that it was just because of herd mentality. I keep getting queries on TFL – “how I can discontinue my SIPs & redeem funds?” and even industry data suggest the same thing that investors are closing the SIPs. In 2010 I wrote this article “Do you really understand SIP” – this talks about why I am saying it was just herd mentality. When discipline fails, the plan fails.
Principles dictate practices – if you don’t believe in principles, these practices will be counterproductive.
Combination of asset classes in different proportions is called a Portfolio. And the PROPORTION in which these assets are mixed is called ASSET ALLOCATION. Asset allocation means dividing the ratio of asset classes for investments as per the RISK and TIME HORIZON of the investment. So your asset allocation can be like-
- 50% Equity 50% Debt
- 50% Real Estate 40% Debt 10% Equity
- 40% Real Estate 40% Debt 10% Equity 10% Gold
- 70% Equity 20% Debt 10% Gold
Or whatever that you or your planner decide.
Diversification is a portfolio in particular asset class. If we are talking about equity (and we are sticking with Mutual Fund for that purpose) – adding 2 large cap funds & 2 mid cap funds is a diversification strategy. If we talk about debt – that can be split in FDs, Bonds, PPF etc. Make sure you don’t under-diversify or over-diversify. Also remember with whatever efforts you make, you will never be able to invest in best performers of future – for that you need a time machine to go back in history.
In Asset Allocation the weightage of each asset class are kept constant. Once you have made this portfolio you just need to rebalance it at pre-decided date. The profit in the asset lass which outperforms is booked & the proceeds are used in the asset classes which underperform in that particular period. This is done keeping the original weightage of the asset class in the portfolio. (same can be done at individual asset level – diversification)
You can read more about Asset Allocation & rebalancing here.
Without any doubt these are testing times for everyone but you have to understand that you should change your investment strategies if there are some changes in your life & life goals and not markets. If you don’t have any investment strategy – build one, write on paper – be it aggressive or conservative – important is it should be consistent. If you don’t have a written policy it will be tough to control your emotions and hope you know “Investing is a Mind Game”. Your behavior is more important than anything else in achieving superior lifetime returns.Stick with your “Goal Focused Investment Strategies”.
Feel free to share your view – what you are going through & what you feel about that.