13 December, 2017

Staying with it & not straying…

Is it possible to ever predict which product will give the best returns in the next one year? It’s very difficult, almost impossible. However, market timing is somehow seen as the one thing that one needs to get right for financial success. Chasing returns and investing in instruments which offer the most returns in the recent past, is a favourite among investors.
However, most fail here. People latch on to a theme after it has run up quite a bit, in the process their timing of entry is really wrong. When the market turns, they do not exit and wait till it almost bottoms out - when they panic and want to exit. And then they sulk, lick their wounds and vow never to go near that asset again. Then they see another one which has risen and glitters on the horizon. They are not interested. The new asset builds up heft and is blazing forth a trail that is lighting up the country. Now the interest builds up & the thought comes up - is this the kamadhenu they were waiting for all along. And then the same pattern repeats, like before!
This has happened with Equity, FDs, gold, real estate… and now with bitcoins!
We as financial planners have seen that it is seldom that important to achieve high returns to achieve one’s goals. What is important is discipline & regularity in investing & a good choice of products according to one’s risk profile. In short, the asset allocation mix should be right.
Every person is comfortable only with a certain level of risk. The portfolio needs to be tailored based on their propensity to assume risk. This is ofcourse only one of the parameters to consider. The others are - number of years to retirement, age & life stage, their time horizon for investment, what their goals are & when their goals are coming up, the dependencies they have on their income & so on.
Based on this, we decide on the asset allocation most suited to a person. We call that strategic asset allocation. This is probably what would work best for them. Sometimes, we may want to somewhat deviate from this core allocation and add assets that could take one away from the strategic asset allocation. That may be done to temporarily increase allocation on an opportunistic basis. For instance, one can have a somewhat higher allocation to equity as compared to the desired level at retirement, as these assets may be required only after 10 years. This is called tactical asset allocation
Tactical allocation may be used from time to time; but it needs to be used carefully. The deviation from the strategic allocation should not be too much. A 10-15% deviation should be fine; but a 50% deviation would not be.
There is another reason to stay near the strategic asset allocation - that is the true comfortable allocation. The farther one deviates from it, the greater the chances of making mistakes - one may panic & exit, when the markets turn rough. For instance, when someone who is conservative by nature has added too much equity in one’s portfolio, would probably panic and sell when the stock markets drop by 20%. This would be hardly be in their best interests.
That’s the reason why we as advisors we give importance to asset allocation. Chasing various products is counterproductive. Various products give returns at various points. One needs to have the product in the portfolio to benefit from any upsides. A good, diversified portfolio that is in line with one’s risk appetite and needs is hence the best bet for a person. We have seen that most client’s goals can be achieved at just 9% posttax returns for the portfolio. If there is a need for very high return to achieve the goals, the goals have to be looked into - not the portfolio!
Getting the asset allocation right & not deviating from it too much, is the way to a well funded future. Stay with it - don’t stray. Sounds boring, I agree. But, truth is generally boring.
Is that the reason, why we find so less of it in life? :)  

Author  -   Suresh Sadagopan  | Founder | www.ladder7.co.in

#SureshSadgopan #FinancialPlanner #FinancialAdvisor #Fiduciary #LifePlanning #FeeOnly #HolisticAdvice #Ladder7

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