Investors have unrealistic expectations of themselves. They expect to accurately time the markets and weave in and out of various assets ontime, everytime. That is the stuff of dreams and mostly remains in the domain beyond our consciousness.
The rabbits of this world think that they can take advantage of every rise and fall and mostly fail. But, let us for a moment assume that they succeed, will it be very useful for them?
Maybe not. Let us examine.
We save money for a reason. Lots of people save money for their children’s education, their own retirement, for building/ acquiring a home etc. Each of these goals have specific timeframes. And each goal has a priority. Investments for these goals, hence needs to be done in a manner consistent with the priority and timeframe.
That is why Financial Planners usually come up with an appropriate asset allocation that will be suitable for a family, based on their goals. Once such asset allocation is decided and invested, it is a good idea to stay invested and not tinker the portfolio, too much. Financial Planners generally invest with a longterm focus , to meet such goals. It is ofcourse necessary to periodically review the portfolio and see if the investments areperforming, as per mandate. If there is a degradation in performance in an investment, generally, it is reallocated into another investment in the same asset class.
However, there can be changes in the situation of the investor or in the macro environment, due to which major changes in asset allocation may be required. At some point, one may for instance take a strategic call to increase equity allocation by 10%, in view of reducing interest rates and the possibility of low interest rates in future. This kind of a strategic change may be required when previous assumptions do not work any longer.
However, there could be cases where one may want to take advantage of the current market situation to an extent without deviating much, from the strategic mean. After, a point, when the situation returns back to the previous normal, the allocation also comes back to the strategic allocation. An example will help here. Let us say the asset allocation suggested for Rameshwar is, 60% in equities and 40% in debt. Due to the current market conditions, the planner may now suggest a tactical realignment of equity to the extent of say 15%, 10% towards debt and 5% towards gold. That may be suggested as both debt and gold are performing well now and the planner may want to allocate to these assets, temporarily. After a time, the allocation will come back, more or less, to 60% Equity and 40% debt. So, tactical allocation may have a role to play but it cannot be allowed to change the strategic allocation itself completely.
Like it was mentioned earlier, strategic allocation can change only if there are major changes in the client situation or in the environment.
Running after the asset classes which are doing well currently and trying to reallocate to a particular asset class, can be detrimental to one’s interest and that is why it is not recommended. For instance, let us say Girish had 50% in Equity and 50% in debt instruments. Due to the fact that equity had not been performing well, he pulled out the money in Equities in April 2011 and reallocated to debt. He is currently happy that his investment in debt is doing well. This is temporary relief and his happiness will be short lived if he does not reallocate to equity eventually. .. for debt investment returns hardly beat inflation and the corpus will infact de-grow in real terms, if he does not come back to equities later. Since there is the timing risk when one allocates in and out of an asset class, it is normally better to keep the allocations intact, apart from a bit of tactical allocation, from time to time.
That may look like a status quo strategy… but the tortoise won eventually in the race, in that tale from Aesop’s fables. The tortoises are the ones who have the faith and patience in their strategy and stick it out. These tortoises win too.
22 October, 2011
Risk Assessment
It’s funny how people respond to the same question, at different points. When things are going fine and optimism is reigning on the altar, people are buoyant and respond positively. The same question in more challenging times, evoke a far more gloomy, sometime diametrically opposite response!
But, many do risk assessment of their clients relying on responses of clients to basic questionnaires containing hypothetical questions. If the answers are going to vary so much based on environmental factors, like we saw earlier, how can this questionnaire be relied as a good indicator of the risk bearing capacity of a client? An example of a typical question in such a questionnaire is –“ What will you choose- a safe instrument giving 9%pa returns year-on-year or another that can give you 12% returns pa over long-term, but the returns every year can vary significantly, including being negative in some years?”. If you had asked this in year 2007, most respondents would have chosen the second option. If you were to pose the same question in 2008 or even now, most would look towards the safety of fixed income instruments!
If the answers vary so much based on the environment, how reliable are they? Clients have long-term goals and those need to be met. In fact this is the most important objective of a financial plan. From that perspective, a certain amount of risk may have to be taken regarding the investments to be done, in the interest of good returns. One cannot just stay invested in debt instruments alone like FDs, NSCs, PPF etc., as they give low real returns. Hence, a client is well advised to invest in Equity assets as well.
Now, if the risk profile shows up the risk bearing capacity of the client as very low, should a planner compromise on the goals and stick to the risk profiler? We have seen that the risk profiler itself could throw up different risk perceptions at different times.
A doctor does not ask the patient which medicine he would have. He simply prescribes them to him and the patient is to have them. The relationship that a financial planner shares with a client is similar. It is for the financial planner to understand the client situation, suggest appropriate instruments to invest in. It is his duty to also make the client understand why he has suggested that asset allocation and what the merits and drawbacks of such an asset allocation strategy are. The client will still have to take the call; but what the financial planner is suggesting is not based on the responses obtained in a simple questionnaire.
This kind of a questionnaire is arguably useful to someone who is just advising clients on investments and does not have complete information of the client and an understanding of his situation. But even then the limitations mentioned earlier, would very much be there. To circumvent this, a questionnaire has to be scientifically validated for consistency of outcomes, over a large sample and has to be standardized. This can help to an extent. It still leaves the other problem – if one were to strictly go by the risk profile, goals may not be met. Hence, there is no alternative to an informed diagnosis and a judgement from a Financial planner on this.
But, many do risk assessment of their clients relying on responses of clients to basic questionnaires containing hypothetical questions. If the answers are going to vary so much based on environmental factors, like we saw earlier, how can this questionnaire be relied as a good indicator of the risk bearing capacity of a client? An example of a typical question in such a questionnaire is –“ What will you choose- a safe instrument giving 9%pa returns year-on-year or another that can give you 12% returns pa over long-term, but the returns every year can vary significantly, including being negative in some years?”. If you had asked this in year 2007, most respondents would have chosen the second option. If you were to pose the same question in 2008 or even now, most would look towards the safety of fixed income instruments!
If the answers vary so much based on the environment, how reliable are they? Clients have long-term goals and those need to be met. In fact this is the most important objective of a financial plan. From that perspective, a certain amount of risk may have to be taken regarding the investments to be done, in the interest of good returns. One cannot just stay invested in debt instruments alone like FDs, NSCs, PPF etc., as they give low real returns. Hence, a client is well advised to invest in Equity assets as well.
Now, if the risk profile shows up the risk bearing capacity of the client as very low, should a planner compromise on the goals and stick to the risk profiler? We have seen that the risk profiler itself could throw up different risk perceptions at different times.
A doctor does not ask the patient which medicine he would have. He simply prescribes them to him and the patient is to have them. The relationship that a financial planner shares with a client is similar. It is for the financial planner to understand the client situation, suggest appropriate instruments to invest in. It is his duty to also make the client understand why he has suggested that asset allocation and what the merits and drawbacks of such an asset allocation strategy are. The client will still have to take the call; but what the financial planner is suggesting is not based on the responses obtained in a simple questionnaire.
This kind of a questionnaire is arguably useful to someone who is just advising clients on investments and does not have complete information of the client and an understanding of his situation. But even then the limitations mentioned earlier, would very much be there. To circumvent this, a questionnaire has to be scientifically validated for consistency of outcomes, over a large sample and has to be standardized. This can help to an extent. It still leaves the other problem – if one were to strictly go by the risk profile, goals may not be met. Hence, there is no alternative to an informed diagnosis and a judgement from a Financial planner on this.
Financial Planning is not investment advisory
There are terms which are used synonymously – but they actually mean two different things. You might have heard of many. Sales & Marketing is one such pair. They are often used interchangeably. Sales is the art of persuading a client to buy a product or service. Whereas, Marketing is the sum-total of all activities from product conception, branding, retailing, communications and beyond, whose overall purpose is to ensure product sales. But these two areas are entirely different. There is another funny indian-ism which I have heard – I’m going to the bazaar for marketing! ( which is their way of saying that they are going to the market to buy stuff ).
A similar confusion surrounds Financial Planning & Investment Advisory. Financial Planning refers to drawing up a blueprint to achieve the goals one may have, through appropriate use of the finances at one’s disposal. Investment advisory however generally refers to understanding client requirements and advising appropriate products to invest in.
An Investment Advisor ( as per Investment Advisors Act 1940 of US SEC ) is a person or a group that makes investment recommendations or conducts securities analysis for a fee. This clearly establishes the limited nature of engagement in case of an investment advisor as compared to a Financial Planner.
A Financial Planner is like an Architect, in the sense that an FP draws up a blueprint of what needs to be done on various fronts like liquidity & cash management, goals feasibility & planning, Risk management, Long-term cashflow planning, estate planning… Investment advice comes at the end in a financial plan, after all aspects have been analysed. It is a by-product of comprehensive analysis of one’s situation. In that sense, the investment advice will simply flow out of the analysis done. For instance, if the risk assessment shows that Rs.1 Crore of insurance is required, then that will automatically come in the recommendation.
Also, unlike in the case of an investment advisor, a financial planner will also look at past investments and offer advice on these, to dovetail with their overall plan. In a nutshell, a Financial Planner looks at one’s finances holistically, in the light of all the goals/ finances overtime.
However, since almost everyone in the Financial Services space – from an insurance agent to a MF distributor to a stock broker – all use the term Financial Planning in a way that is convenient to them, there is lot of confusion in the minds of the public at large. A chemist cannot call himself a Doctor. Similarly, an agent/ distributor should not be allowed to call himself a Financial Planner. Such legislation is the need of the hour. However, SEBI through it’s Concept Paper on regulation of Investment Advisors is proposing to call an Investment Advisor anyone who is offering Financial Advice, Financial Planning Services or any action that would influence an investment decision. This is extremely curious as financial advice, financial planning & something that influences an investment decision are three different things and cannot be clubbed under the single head of Investment Advice. Financial Planning is not Investment Advisory, though it is a small part of the overall plan. An Investment Advisor indicates a far more limited role than what a Financial Planner performs. More confusion will result if this concept paper sees the light of the day.
Again, many use the appellation “Financial Planner” just because they have completed a Financial Planning course but continue to be an insurance agent. This again confuses the normal investor as they see a person who is an agent use the tag - Financial Planner.
The need of the hour is hence for the investing public to know, who is a Financial Planner, who is an agent and who is a Investment Advisor. Only then they would know as to whom to contact for what. Simply calling a whole lot of people investment advisors would only confuse issues for the public and result in them approaching the wrong kind of advisors, which is precisely what SEBI may want to avoid.
A simple rule applies as always for you – Keep your eyes and ears open. Understand what a particular person can do for you irrespective of what they call themselves. Check out past work they have done; talk to a few references; check whether they have appropriate qualifications, standing & experience in the field. Finally find out what they are charging and evaluate for yourself if that offers a good value proposition or not.
There is just no alternative for keeping one’s one’s eyes open and ears to the ground. A healthy dose of common sense additionally helps!
A similar confusion surrounds Financial Planning & Investment Advisory. Financial Planning refers to drawing up a blueprint to achieve the goals one may have, through appropriate use of the finances at one’s disposal. Investment advisory however generally refers to understanding client requirements and advising appropriate products to invest in.
An Investment Advisor ( as per Investment Advisors Act 1940 of US SEC ) is a person or a group that makes investment recommendations or conducts securities analysis for a fee. This clearly establishes the limited nature of engagement in case of an investment advisor as compared to a Financial Planner.
A Financial Planner is like an Architect, in the sense that an FP draws up a blueprint of what needs to be done on various fronts like liquidity & cash management, goals feasibility & planning, Risk management, Long-term cashflow planning, estate planning… Investment advice comes at the end in a financial plan, after all aspects have been analysed. It is a by-product of comprehensive analysis of one’s situation. In that sense, the investment advice will simply flow out of the analysis done. For instance, if the risk assessment shows that Rs.1 Crore of insurance is required, then that will automatically come in the recommendation.
Also, unlike in the case of an investment advisor, a financial planner will also look at past investments and offer advice on these, to dovetail with their overall plan. In a nutshell, a Financial Planner looks at one’s finances holistically, in the light of all the goals/ finances overtime.
However, since almost everyone in the Financial Services space – from an insurance agent to a MF distributor to a stock broker – all use the term Financial Planning in a way that is convenient to them, there is lot of confusion in the minds of the public at large. A chemist cannot call himself a Doctor. Similarly, an agent/ distributor should not be allowed to call himself a Financial Planner. Such legislation is the need of the hour. However, SEBI through it’s Concept Paper on regulation of Investment Advisors is proposing to call an Investment Advisor anyone who is offering Financial Advice, Financial Planning Services or any action that would influence an investment decision. This is extremely curious as financial advice, financial planning & something that influences an investment decision are three different things and cannot be clubbed under the single head of Investment Advice. Financial Planning is not Investment Advisory, though it is a small part of the overall plan. An Investment Advisor indicates a far more limited role than what a Financial Planner performs. More confusion will result if this concept paper sees the light of the day.
Again, many use the appellation “Financial Planner” just because they have completed a Financial Planning course but continue to be an insurance agent. This again confuses the normal investor as they see a person who is an agent use the tag - Financial Planner.
The need of the hour is hence for the investing public to know, who is a Financial Planner, who is an agent and who is a Investment Advisor. Only then they would know as to whom to contact for what. Simply calling a whole lot of people investment advisors would only confuse issues for the public and result in them approaching the wrong kind of advisors, which is precisely what SEBI may want to avoid.
A simple rule applies as always for you – Keep your eyes and ears open. Understand what a particular person can do for you irrespective of what they call themselves. Check out past work they have done; talk to a few references; check whether they have appropriate qualifications, standing & experience in the field. Finally find out what they are charging and evaluate for yourself if that offers a good value proposition or not.
There is just no alternative for keeping one’s one’s eyes open and ears to the ground. A healthy dose of common sense additionally helps!
Changing jobs will not solve your money woes
There is enough depressing news in the papers these days – national & international. One persistent news that depresses me no end is how money is being wasted by our government. One of those was the hundreds of crores being spent in Mumbai on roads and yet the roads are filled with potholes. Hold your breath now… after being inundated with complaints about potholes, BMC awards contracts to the same contractors for makeover of those roads! Leakages abound in all government schemes like Public Distribution System, NREGS, government schools and most other public welfare schemes, where siphoning of funds even top 50%, in some cases. Is government plugging the holes? Nope, though it claims to do so. It just looks for sources to raise more revenue, when it first needs to plug the massive leakages. Coupled with it, government spends recklessly and runs deficits. This is the classic problem with most governments and the reason for the various crises across the world.
Reckless spending… profligacy, in a word. That’s the problem. Just like governments, we find the same problem with some of our clients. Thankfully, it is not as widespread as it is in the case of governments!
When some of these clients come for Financial Planning, we have problems. It surprises us that these people could have money problems at all, as most clients who come to us earn pretty well. In fact, in most cases, they are double income families. That’s why it surprised me when we found out that Raveena will not be able to meet some of her goals. Her husband Abhilash, again, earned a handsome packet. Still, it would be a challenge for them to buy a bigger home and ensure that they send their son abroad for education, like they wanted to.
At first, we thought we got some numbers wrong. We rechecked all the numbers and sought clarifications. The numbers we had taken in the plan were right, after all. What stood out like sore thumbs were the various expense heads – Rs.15,000 pm for fuel, Rs.26,000 pm for groceries/ provisions/ milk, Rs.10,000 pm for entertainment etc. The basic monthly expenses came to Rs.72,000. There was also a total EMI outgo of another Rs.63,000 pm. Apart from that they had other chunky annual expenses like Rs.3 Lakhs for Holidays & vacation, Rs.1 Lakhs towards Gifting etc. totaling Rs.5.9 Lakhs. They had committed expenses of Rs.95,000, towards insurance. All in all, they were spending with gay abandon with just Rs.1.6 Lakhs, as surplus in a year. That sounds like a positive story, while actually it is not.
Their burn rate is so vigourous that it leaves precious little for investments, to meet the future goals, including retirement funding. When I broke this news to them, their solution was simple. They almost nonchalantly said that they would change their jobs!
That was stunning news to me. What a solution! This is what every government does – increase the taxes. Has it ever helped? Nope. The problem is not income. It is expenses.
So I told them and an argument ensued. I argued that one should keep the expenses under wraps and be careful in upgrading the lifestyle, for it is easy to go up in life and very difficult to come down on it. They thought I’m too conservative and old fashioned.
They opined that they anyway change their jobs every 2-3 years and have no regrets about it. They also felt that if expenses go up, income can be made to go up too. So, if there is a need to save more, they can bring in more income. They were hence not able to understand, what I’m quibbling about.
I countered that though income can keep going up till a point, it cannot keep going up by huge margins, forever. If expenses keep spiraling, one will not be able to offset it by higher income. Also, higher expenses raises the bar forever. One will not be able to come down from that level. Moreover, more income will simply mean more expenses in their case, for that is how they have been living. I rested my case saying that more income will not solve any problems for them.
This was sobering for them and they wanted to think about it. Many in their situation are in denial about their spending and almost go into a depression if told to curtail expenses. But excessive spending is a disease and not being able to save enough for future is just the symptom. The pill that cures that is not more income. We need to attack the disease head-on, which is streamlining expenses. Only then the symptoms will vanish and the patient will recover. If continued for long enough, the situation will be like that of many governments today, where they spend much more than what they earn.
Income one earns is seldom the cause for concern. Excessive spends and lofty goals not aligned with income, are. Internalise this and your nest will be nicely feathered. Ignore it at your peril.
Authored by Suresh Sadagopan ; Published in Moneycontrol.com on 17/10/2011
Reckless spending… profligacy, in a word. That’s the problem. Just like governments, we find the same problem with some of our clients. Thankfully, it is not as widespread as it is in the case of governments!
When some of these clients come for Financial Planning, we have problems. It surprises us that these people could have money problems at all, as most clients who come to us earn pretty well. In fact, in most cases, they are double income families. That’s why it surprised me when we found out that Raveena will not be able to meet some of her goals. Her husband Abhilash, again, earned a handsome packet. Still, it would be a challenge for them to buy a bigger home and ensure that they send their son abroad for education, like they wanted to.
At first, we thought we got some numbers wrong. We rechecked all the numbers and sought clarifications. The numbers we had taken in the plan were right, after all. What stood out like sore thumbs were the various expense heads – Rs.15,000 pm for fuel, Rs.26,000 pm for groceries/ provisions/ milk, Rs.10,000 pm for entertainment etc. The basic monthly expenses came to Rs.72,000. There was also a total EMI outgo of another Rs.63,000 pm. Apart from that they had other chunky annual expenses like Rs.3 Lakhs for Holidays & vacation, Rs.1 Lakhs towards Gifting etc. totaling Rs.5.9 Lakhs. They had committed expenses of Rs.95,000, towards insurance. All in all, they were spending with gay abandon with just Rs.1.6 Lakhs, as surplus in a year. That sounds like a positive story, while actually it is not.
Their burn rate is so vigourous that it leaves precious little for investments, to meet the future goals, including retirement funding. When I broke this news to them, their solution was simple. They almost nonchalantly said that they would change their jobs!
That was stunning news to me. What a solution! This is what every government does – increase the taxes. Has it ever helped? Nope. The problem is not income. It is expenses.
So I told them and an argument ensued. I argued that one should keep the expenses under wraps and be careful in upgrading the lifestyle, for it is easy to go up in life and very difficult to come down on it. They thought I’m too conservative and old fashioned.
They opined that they anyway change their jobs every 2-3 years and have no regrets about it. They also felt that if expenses go up, income can be made to go up too. So, if there is a need to save more, they can bring in more income. They were hence not able to understand, what I’m quibbling about.
I countered that though income can keep going up till a point, it cannot keep going up by huge margins, forever. If expenses keep spiraling, one will not be able to offset it by higher income. Also, higher expenses raises the bar forever. One will not be able to come down from that level. Moreover, more income will simply mean more expenses in their case, for that is how they have been living. I rested my case saying that more income will not solve any problems for them.
This was sobering for them and they wanted to think about it. Many in their situation are in denial about their spending and almost go into a depression if told to curtail expenses. But excessive spending is a disease and not being able to save enough for future is just the symptom. The pill that cures that is not more income. We need to attack the disease head-on, which is streamlining expenses. Only then the symptoms will vanish and the patient will recover. If continued for long enough, the situation will be like that of many governments today, where they spend much more than what they earn.
Income one earns is seldom the cause for concern. Excessive spends and lofty goals not aligned with income, are. Internalise this and your nest will be nicely feathered. Ignore it at your peril.
Authored by Suresh Sadagopan ; Published in Moneycontrol.com on 17/10/2011
Don't get carried away by one pet asset class
I have always been fascinated by Raju, our friendly neighbourhood shopkeeper, who defies any slotting – for he changes stripes with the season. His is a stationery cum general store, normally. But, now his shop would have morphed into a fireworks shop, during this time of the year. After Diwali, he will get back to being a stationery and general store and again by Christmas, he would again do his Houndini act and transform it into a Gifting cum sweets/ bakery shop. And so it keeps happening throughout the year.
There is nothing like a core competence for him, unlike Miteshbhai. Miteshbhai is into stationery business and he sticks to it, like a horse with blinkers. But, in this field, he is an ace. His range is wide & his stocking deep. Even if he does not have an item when a customer asks for it, he notes it down and ensures that he has it in his shop. Hence, he is well known in the entire locality for stationery and has a loyal clientele. Miteshbhai has done very well for himself, while Raju is still a struggler.
Raju’s tactics of taking advantage of every situation finds resonance with people in various walks of life. Infact, the Rajus are generally considered to be “street smart” & Savvy. Yet, in the final analysis, the opposite is true.
This Raju-like propensity is displayed by many with their investments too. The smart-alecs think that they can move in and out of various investment products, riding the crest of every wave and switching to the next rising wave, timing the whole thing to perfection. This is what is currently being played out, when it comes to Gold and property. Gold has been doing well throughout the year. It has also given excellent returns for the last 10 years. Hence, there is a buying frenzy in Gold today. The assumption is that Gold will continue to climb in times to come and will prove to be a fantastic investment. In fact this is assumed to be the case and people come to us seeking advice whether they could put all or most of their investments into Gold.
The frenzy about property is similar. There are many who have tasted success in property investments over the past 5-7 years. This has given them an aura of invincibility and many see themselves as someone endowed with a midas touch. But, all boats are lifted by the high tide. It is only when the tide turns, we will know who has been swimming naked, as Warren Buffett had once colourfully remarked.
Predicting the ups and downs of one asset class is one thing. This may help in making money. But predicting that to a nicety and doing it with different asset classes over and over again, is entirely another. Different asset classes have different dynamics. One needs to see the risk attached to the investment class, liquidity, tenure, taxation and other aspects before choosing the correct mix.
Choosing the correct mix of asset classes based on one’s goals, is of paramount importance. At different points, different asset classes will perform well. The assets one chooses should match the time frame when the proceeds are required, the risk one is willing to assume to get the returns, liquidity etc. Some asset classes like equities may perform well only in the long-term and one has to give it sufficient time to deliver results. In the short-term, the volatility in equities could be gut-wrenching. So if one has chosen equities as a part of the overall asset-allocation, short-term volatility will not cause any disruptions and heartburns.
The next on the totem pole is diversification. No matter how well an asset class is performing, it is always a better idea to spread one’s investments among the various asset classes – for overtime, one asset class can slacken and another will take the slack. Not for nothing do we have a wisecrack like “Do not put all your eggs in one basket”.
Choosing just Fixed Deposits or Gold or Property , just because they do well now, is hence not a great idea. Choosing the product which is currently doing well and cycling among those from time to time, will again not meet the longterm objectives. For one, in this process of choosing the current favourite, one may actually get trapped in the down cycle – like in properties ( which has long cycles ). The other is that, one will end up with the wrong set of products that do not meet one’s requirements overtime.
Jumping from one to the other product may look exciting. But sticking to a pre-meditated asset allocation strategy brings home the bacon. Miteshbhai can vouch for that. Due to his roving, free-wheeling ways, Raju ab tak nahi bana Gentleman!
Authored by Suresh Sadagopan ; Published in moneycontrol.com on 14/10/2011
There is nothing like a core competence for him, unlike Miteshbhai. Miteshbhai is into stationery business and he sticks to it, like a horse with blinkers. But, in this field, he is an ace. His range is wide & his stocking deep. Even if he does not have an item when a customer asks for it, he notes it down and ensures that he has it in his shop. Hence, he is well known in the entire locality for stationery and has a loyal clientele. Miteshbhai has done very well for himself, while Raju is still a struggler.
Raju’s tactics of taking advantage of every situation finds resonance with people in various walks of life. Infact, the Rajus are generally considered to be “street smart” & Savvy. Yet, in the final analysis, the opposite is true.
This Raju-like propensity is displayed by many with their investments too. The smart-alecs think that they can move in and out of various investment products, riding the crest of every wave and switching to the next rising wave, timing the whole thing to perfection. This is what is currently being played out, when it comes to Gold and property. Gold has been doing well throughout the year. It has also given excellent returns for the last 10 years. Hence, there is a buying frenzy in Gold today. The assumption is that Gold will continue to climb in times to come and will prove to be a fantastic investment. In fact this is assumed to be the case and people come to us seeking advice whether they could put all or most of their investments into Gold.
The frenzy about property is similar. There are many who have tasted success in property investments over the past 5-7 years. This has given them an aura of invincibility and many see themselves as someone endowed with a midas touch. But, all boats are lifted by the high tide. It is only when the tide turns, we will know who has been swimming naked, as Warren Buffett had once colourfully remarked.
Predicting the ups and downs of one asset class is one thing. This may help in making money. But predicting that to a nicety and doing it with different asset classes over and over again, is entirely another. Different asset classes have different dynamics. One needs to see the risk attached to the investment class, liquidity, tenure, taxation and other aspects before choosing the correct mix.
Choosing the correct mix of asset classes based on one’s goals, is of paramount importance. At different points, different asset classes will perform well. The assets one chooses should match the time frame when the proceeds are required, the risk one is willing to assume to get the returns, liquidity etc. Some asset classes like equities may perform well only in the long-term and one has to give it sufficient time to deliver results. In the short-term, the volatility in equities could be gut-wrenching. So if one has chosen equities as a part of the overall asset-allocation, short-term volatility will not cause any disruptions and heartburns.
The next on the totem pole is diversification. No matter how well an asset class is performing, it is always a better idea to spread one’s investments among the various asset classes – for overtime, one asset class can slacken and another will take the slack. Not for nothing do we have a wisecrack like “Do not put all your eggs in one basket”.
Choosing just Fixed Deposits or Gold or Property , just because they do well now, is hence not a great idea. Choosing the product which is currently doing well and cycling among those from time to time, will again not meet the longterm objectives. For one, in this process of choosing the current favourite, one may actually get trapped in the down cycle – like in properties ( which has long cycles ). The other is that, one will end up with the wrong set of products that do not meet one’s requirements overtime.
Jumping from one to the other product may look exciting. But sticking to a pre-meditated asset allocation strategy brings home the bacon. Miteshbhai can vouch for that. Due to his roving, free-wheeling ways, Raju ab tak nahi bana Gentleman!
Authored by Suresh Sadagopan ; Published in moneycontrol.com on 14/10/2011
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