With markets now near all-time highs, one of the jargons that is on top of the pile is “Asset Allocation”. Every newsletter or interview, whether of your fund manager, your broker or your bank refers to this term and advises investors to heed market valuations and “stick to their asset allocation”.
While Asset Allocation is one of the most under-estimated tools for building long-term wealth, the words “asset allocation” themselves are quite a technical term and these words are not necessarily part of an average investor’s lexicon. This implies that many investors may not be aware of what this term means, or even worse, may have a wrong understanding of this term.
That said, Asset Allocation is one of the most under-estimated tools for building long-term wealth, and the below primer explains what Asset Allocation is, why and how you should use it and how you can benefit from it.
What type of investor are you and how actually do you manage your personal finances? Am guessing that this is not something that many of us are familiar with or will find easy to answer. Unfortunately, while it should be, personal finance is not as “personal” a topic to most people as personal health is.
Hence over the last many years, while we have seen many customers with regards to how they manage their personal finances, they themselves are not as clear as we can see it, and hence make the wrong decision about what kind of personal financial assistance they need.
That said, it is important to have the right fit between your type and the kind of professional help you take. This article helps you determine what kind of an investor you are and whether the current relationship you have with a financial advisor is of the right fit. Published in Moneycontrol.
In the past weeks, the 32nd Olympics, Tokyo2020, provided the world with sporting excellence and entertainment on display across a range of disciplines. For avid sports fans, these two weeks were exciting days, merrily switching live-streams across events as diverse as hockey, gymnastics, track & field, badminton and golf.
While there were winners, we discovered there were many more heroes, some whose names we heard for the first time, but will remember for long. The Olympics provided some memorable moments but also lots of food for thought. Here are a few observations, particularly pertinent in these raging bull markets.
In the last few years, we have experienced two changes that are here to stay – One, the average investor is getting younger. And two, the investing process has moved to being fully digital.
These two factors, combined with the new-age confidence that today’s younger generation possesses, has led to more and more investors seeking to invest on their own. Or as it is known popularly, DIY (Do-it-yourself).
That said, investing in markets is fraught with risks, and understanding those risks and preparing for them is a critical pre-requisite for both creating and protecting wealth. Hence having a laid-own process with key steps to follow will help DIY investors have a guide-map to reach their objectives as well as guard-rails to ensure that they don’t fall off in the interim.
A friend was talking to me recently about an interaction he was having with some others, where there was a furious debate on about where to invest, as well as which asset classes including geographies would deliver better returns going forward. As you would agree, this particular topic of debate is not uncommon at all and today’s information-empowered world has led to both more aware investors as well as more confused investors.
Investors usually seem overtly focused on “returns” and are always keen to know where to put their money next. This is especially so during a bull market, and when the recent past has given very good returns. But, excessive focus on returns is usually a function of “not enough focus” on a few other important yet ignored aspects. Focusing adequately on these other aspects leads to enough and more clarity on which asset class an investor should choose and what “returns” the investor should expect going forward.
Are real life situations and financial decisions assessed for risks in a very similar way by investors? There are parallels but they are not always handled similarly. Here are some anecdotes with some pertinent personal finance lessons, that helps us understand the differences in the choices people make in real-life situations, vs managing their money.
Read our latest article, published on Moneycontrol.
Enough has been spoken about the markets in last few months, including the never-seen-before kind of drops and recoveries. In such times, one would have assumed that retail investors would have beaten a hasty retreat, hoping to come back when markets seem a bit saner.
Surprisingly, that is not the case. The below 2 published data points indicate otherwise.
New demat account openings for most brokers have surged, with anywhere between 50 to 200% increases being reported, many of them first-time users.
Retail investors took advantage of the available time (due to the lockdown) and the valuations (in March & April post the ~ 35% crash) to enter and invest in the stock market to make some “quick” returns
Considering that the bulk of these new additions are online, it can be presumed that the average new investor is young and technology-savvy, while not afraid to take risks while seeking to make a quick buck
Is this good news? Well, it depends on how one looks at it. History indicates that institutional investors are generally smarter than retail, who usually enter late to the party. The average holding returns of mutual funds is significantly higher than the average investor returns in the same funds, underscoring this fact.
On the other hand, the fact that the market participation is broadening and that too in times of market distress is heartening and shows some maturity in the mind of the average retail investor. This millennial generation is possibly different and smarter than its precursors. They are also adopting the new “do-it-yourself” way, already popular in developed countries.
That said, trading in the stock market for short term gains is fraught with risks, and can result in substantial capital loss, if one doesn’t have a good hang of what one is doing. Having an Investment Framework based on the following 4 levers can possibly help today’s investor to increase his or her chances of success in the stock market.
Strong Knowledge-based Investment Hypothesis
Know each stock you invest in. Spend time on research, make sure you understand the company and its prospects, and do not get lured by tips and penny stock advice. This is fundamental to your framework and dilution here is akin to having a rotten foundation, leading your structure to fall, sooner or later.
Laid-down Investment Horizons & Goals
Even the best race-car driver needs a destination, a target. Similarly, map your purchase to an outcome based on your investment hypothesis, with a time-horizon in mind. Tie it to a goal, so that neither does your horizon become a moving target, nor are you tempted to exit early during adversities, impacting your goal.
Clear & Documented Process for Exits
Based on your investment hypothesis, you will know when you need to book profits, in case your target/goal is met. Similarly, however good your investment hypothesis might have been, factors change and hypotheses fail. So have a clear plan to exit in case things don’t play out the way you saw them. Having a documented process for both value-based and time-based exits, with clear rationales, is a good way to both, limit your losses and not fall in love with your darlings.
However good your stock selection maybe, expecting each to be a winner is unreasonable. Diversification is a hedge against both, failed hypotheses as well as capital loss. Build a portfolio of 15-20 stocks over time and have a cap on each stock as a % of your portfolio. 6 winners out of 10 is a good enough ratio for the portfolio.
Dear retail investor, Success in the stock market is an outcome of 3 factors – Relevant Knowledge, Robust Process and Resilient Temperament. Please use the above-mentioned levers to build a personal Investment Framework and whenever you feel swayed by emotion, go back to it and read it. You will find that not only is it helpful in the stock market, but in everyday life too. Happy investing!
Image credit: MayoFinance, Unsplash
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A slightly modified version of this article was published recently on fpstudycircle.com.
We are now deep into the festival season, and normally, it would be visible, through the familiar sights and sounds associated with it. This time around though, things are different.
But one thing hasn’t changed much and that is us waiting with bated breath for Sale Season. Offline or Online, there is something about Sales that get us going. We are inherently deal-seekers, and good deals get us all pumped up.
Unfortunately, the same cannot be said of our actions when it comes to our investments in the markets. The same shopper as investor feels more comfortable entering the financial markets when markets are at highs rather than at lows. And panics to sell assets at a loss when there is a market crash, rather than buying more.
Read on to know more in our latest article, published on Moneycontrol.
In the last couple of years, there has been a lot said and done with respect to categorization of mutual funds. The regulator has attempted to put some structure in place for fund houses and managers through the categorization guidelines, in order to help investors make informed choices.
That said, it can still be quite confusing for the lay investor to understand these categories. Thankfully, there is something else that is universally understood. Cricket! And within it, IPL!
Fans know every team’s strengths and weaknesses while having his or her favourite teams to root for. So, if equity mutual fund categories were IPL 2020 teams, who would they be?
Read our latest article, published on Moneycontrol.
Building a good diversified portfolio is a journey, not a one-time action. It is not a straight-line process either, and many a times, involves taking a step or two back as well, while the overall direction is forward.
As planners, this is something we do periodically, in order to exit assets, which we feel are not well-poised for the future and move to investments which are more aligned towards the goals and expectations. While one would think that conversations for making such changes in portfolios would be easy, many a times, they are not.
Here are a few pointers for you to ponder on, so that your portfolio review exercise ends up cutting your weeds and nurturing your flowers.
Read our latest article, published on Moneycontrol, to help you build a portfolio that resembles a bunch of roses and not a bush of thorns.