My answer has always been the same: why do you need to do anything? And that doesn’t fly well. A no action advice is not a good advice apparently. When he seemed unconvinced, I told him not to seek excitement in his long-term portfolio. I further advised him to have a separate trading portfolio where he can seek all his thrills or may be join me for a game of poker and get his dose of dopamine!
The advice to all retail investors (HNIs included) is to follow just a few boring principles consistently over a long period of time. That’s the tough part – consistently.
Here are these seemingly boring but simple and effective principles:
1. Goal Setting: This is first but the most important step in an investment plan. Be it creating an emergency corpus or buying a home or planning for retirement, all goals should be included while planning. If your advisor isn’t asking you what your goals are then change your advisor.
Not having goals in your plan is the same as planning to fail.
2. Risk Profile: Risk profile is both willingness and ability of an investor to take risks. Ignore these two at your own peril. Risk capacity or ability is easy to determine. The willingness to take risks or risk aversion matters equally if not more. Many investors panic and sell equity when markets see large downward movements – like in March 2020 along with the first covid wave. As unpredictable the markets are, they do bounce back but most of these investors remain in side-lines hoping for the markets to give them an entry level again. Even geniuses can’t time the market regularly and consistently with success. An advisor’s role becomes significant here – to ensure that the investor ignores the short-term volatilities in achieving their long-term goals. Else, investors remain under allocated to equities for a long time.
3. Asset Allocation: How much to be allocated to equity, fixed income, gold? It depends on the risk profile and the duration of the goal. For less than 5 years goal, allocation to fixed income and gold should be higher vis-à-vis long tenure goals. Maintaining asset allocation is key and the advisor should also adjust asset allocation as the goal nears. Regular rebalancing ensures that over and under allocation to any one asset class is corrected. Tactical asset allocation (if any) should be exercised with due caution.
4. Underlying Investments: Have more allocation to passive index funds than actively managed ones. Predicting which strategy and manager would do well from is like predicting the markets – very hard to be right. The savings in terms of lower fees are significant too. Our estimate suggests that the average returns in equity portfolios could be 14 to 22% higher in absolute terms over long periods (20 years) by being in a passive portfolio. So, Rs. 1 cr portfolio may be Rs. 14 to 22 lacs higher in value by simply moving to lower cost index funds. Fixed income allocation can be devoid of credit risk fully except for situations when credit spreads are really attractive. Sovereign gold bonds are the best way to invest in gold.
Most advisors would stop here leaving out a very important principle.
5. Ignore the noise: Everyone is inundated with too much information too frequently on that pocket devil (of a mobile phone). Global Financial Crisis of 2008. Emerging markets meltdown in 2013. Trump won. Trump lost. No to Brexit. Yes to Brexit. Covid 1 st wave, 2 nd wave, etc. Investors should be aware of what’s happening but not necessarily take action in their portfolios. Equity markets are volatile but they eventually recoup.