Wednesday, 20 Feb 2019

Why making money is all about asset allocation


The most commonly asked question when someone comes to know that I work in the area of investments is: Where should I be investing my money now? From the seekers of 'just one stock's name' to those who worry whether China will crash further, everyone is keen to know what they should be doing with their money. Now. The anxiety about getting the timing right is quite alarming. And to imagine that managing the 'now' is equivalent to managing money well, is even worse. Why is this so?


First, unless you have inherited a fortune and have decided to spend the rest of your life living off it, you have a lifetime of making money ahead of you. And in most cases, your earnings will grow with time. So what you do with those few thousands that you want to carefully invest today is likely to turn out to be quite insignificant, compared to the wealth you will build over a lifetime. Don't sweat over the decision to split that Rs 5,000 SIP into five different funds. Just keep investing if you want to build long-term wealth.


Second, every single investment decision you have made can be revised, reviewed and reworked. The trouble is that you might fail to do it because you hate regretting your decisions, and you like to muster support for what you have already done. The skill to develop is not about choosing right; the skill to develop is to acknowledge that you may have made a mistake and own up. End those useless premium payments on policies that are giving 6 per cent returns. We all make mistakes with our choices. The good thing is that we can also correct it.


Third, however great the tip you get might be, you are unlikely to stake a lot on it. You are likely to be inherently suspicious about what might work and are likely to invest less, not more. So in the overall scheme of things, the fact that you invested too little in that investment that turned out to be a multi-bagger is a reality you will live with—unless you were the promoter or an early employee of that company. How much of equity investments you have matters much more than which specific stocks you hold. Do not complicate needlessly.

Fourth, since you are not likely to invest too much even in that accidental investment that turned out to be a star, you are likely to have too many things in your portfolio. You might lack the conviction to buy more when what you have is doing well. You will think there are other things to buy. So you will spread your investments across so many stocks, funds and IPOs that your return will actually average out. If you list your investments in a worksheet, and have to scroll down to see the end of the list, you are needlessly holding too much.


Fifth, if you are feeling very smart about having bought property early on and doubled your benefit by taking a loan to fund it, take a deep breath. It is likely that real estate is a huge chunk of your assets, and if you like any meaningful and flexible use of your assets in your lifetime, you need to build other financial assets. If property is over 30 per cent of your assets, you are living for the benefit of the next generation and are likely to leave behind houses that your kids may not care about much, or in the other extreme, fight to a bitter acrimony.
What can you do instead? You can begin with the realisation that asset allocation matters. It matters so much that I am willing to go to my grave screaming that this is the only thing every investor should know. You need not see it like a textbook lesson. You can instead see it as a reality of your life, over the time you earn, save and invest. You spend a lifetime trying to correct and align your assets to your current and future needs. But if you get it right, you are done. And this is not a "now" task in investing, but a strategy and style that will underline everything you do with your money


You could be young and so in need of cash every now and then, and your allocation would be skewed to liquid assets that you can access. You will give up better investment return when you do that. So you learn the habit of slowly allocating to higher return yielding long-term assets, such as equity. If you instead made a swift jump to buying a property using a loan, you might end up using your credit card when you need cash for today. At every stage of your life, the critical decision you make is about this balance—what you need today, and how you should not let that overtake what you might need tomorrow.

In retirement, you need regular income and you choose assets that will deliver that income. But you will end up in poverty in old age if your assets do not grow in value and fight inflation for you. You need not jump into the next high interest investment that just opened in your street corner, taking on a risk you can hardly bear. But you can allocate to equity those assets you are not likely to immediately draw upon.


All your money decisions are asset allocation decisions. Except that there is no formula that works for all, nor will a formula work for one all the time. But then columnists like me are held to the dagger by the seekers of simple rules. I will therefore venture to recommend 50:50. Invest 50 per cent in income-yielding assets, and 50 per cent in growthoriented assets. At all times, each month, each year and as you put money—lump sum or instalment—aside. If you feel bold and good about yourself, push the allocation growth to 70 per cent; if you feel a bit worried and unsure, push it down to 30 per cent. Between these three allocations, all of us should fit. Except of course those who believe that every now and then their portfolios should be turned upside down, to fit a complex formula that leads to surefire success. And those who like to tinker some more, and love the thrill of markets and money. Make your money life simple—in your own interest.


This is  an article written by UMA SHASHIKANT on NOVEMBER  2,2015 which published by The Economic Times.



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