Since our launch, we have had many subscribers ask us questions such as:
“When should I reallocate?”
“When should I move out of equity?”
“I am investing for the long term. But are there portfolios that will give me some tactical exposure?”
The good thing about all these questions is that most of them said they were investing for the long term. The not so good thing is the multiple layers of complexity they added to investing.
I am not going to give any lessons on financial planning in this essay. However, having dealt with or observed investing behavior of several thousands of investors, it is my thought that you broadly need to get these 5 things in place and continue practicing those, when you invest.
- Save and invest regularly
- Know what you are saving for and a ballpark figure of how much you need to save
- Track your goals separately. Different strokes for different goals
- Stay with good products (review your investments)
- Rebalance (discussed in quick check tool tip and the rebalancing section)
In the interest of your time, under each sub-head, I have given (in parenthesis) what you can skip and what you must still read, if you are a discerning investor.
Save and invest regularly
(If you are already doing this, do still read the quick check tip we have at the end of this section).
This is non-negotiable. When I say save regularly, I don’t mean you do only through SIPs, you can invest lumpsums too. However, if you do lumpsum investing without an idea of how much you need to save for your future goals, you have a problem. Regular saving and investing makes it easier to track goals by breaking down your plan of action into capsules that also help you finetune as you go.
For example, suppose you have a goal of, say, Rs 30 lakh in 10 years for your child’s undergrad. Now if you had a return expectation of say 10% annualized, you could say you need to invest Rs 11.5 lakh today to reach Rs 30 lakh or invest Rs 15,000 a month for the same goal and same return expectation. The latter (regular investing) is simpler for a few reasons: It seems less daunting when the amount is broken down into monthly savings. It avoids wrong timing of market. You have a higher chance of regularly tracking and upping savings gradually (not invest and forget).
But remember, if you aspire big, your escape route is not tweaking your return expectation to 20-30% in your calculator. It doesn’t work that way. You must up your savings!
Next, when we say invest regularly, we need to be sure which investment vehicles lend themselves well to this. For example, regular investing or SIPs directly in stocks can be a hard and even risky proposition. It can get very stressful to use them as vehicles to build for goals less than 15 years.
It is only when you build a sizeable portfolio of stocks that it becomes more predictable to assign them to specific goals such as retirement or leaving an inheritance etc. That way, mutual funds (and ETFs) and simple fixed income products such as deposits are most amenable to practicing disciplined investing.
The quick check tip: Investing regularly and in a disciplined way does not guarantee your achieving the goal. Midway, you may realize your returns are turning out to be lower than what you expected. The antidote to lower returns from the market is only saving more. If you want a high-sounding name to this, it is called value averaging (not SIP). Value averaging essentially makes you invest more when your returns are lower than your expectations and vice versa. But make sure your return expectations are not outlandish and in line with the nominal GDP growth rate.
You don’t need any specific tool to do value averaging or try to time the market. On an annual basis, when you check your portfolio returns (after making sure you are with the right funds) and you see it more than 4-5 percentage points lower than your expected return, deploy some surplus in addition to the SIP running. This is because when your returns are lower (assuming your funds are quality ones), it means the market is underperforming. So, by deploying more, indirectly, what you are doing is investing more when markets are lower. The beauty here is that you need not know where the market is. You simply need to know where your portfolio stands vis-à-vis expectations. Now, if your next question is whether to sell and exit some amount if your returns are higher, please don’t. We will discuss this in the rebalancing section below.
Know how much to save
(you may be already doing this. If so, move to the section on portfolios for different goals)
If you save without knowing how much to save and for what you are saving, then there is a very high chance you don’t meet your aspiration. All you need for this is some basic excel calculation (or calculators) to get a ballpark figure on how much you need into the future. Please note that I am not talking of the 10-page financial planning reports here. You can get such reports done if they give you some comfort but please note that with at least half a dozen assumptions and caveats, they are not cast in stone. They keep changing. Hence, don’t get too fixated on coming up with a super-plan. Simply know what you are saving towards and how much money you need to commit to that.
Tip: Go back to the section above on quick check tip to make sure you add more if your savings seem inadequate.
Portfolios for different goals
(I would urge all to read this)
I received a mail just few days ago from an investor who said he had 6 different goals and his planner advised him to maintain just one portfolio. While this may have been said to avoid fund duplication, it will not help build/track portfolios optimally for each goal.
Having a single portfolio has other limitations as well. Asset allocation will vary for different goals with different time frames. The strategy/risk profile and therefore the category of funds or ETFs that each portfolio needs will vary. Let me give an example: a value fund is ideally avoided for a 3-5-year portfolio while it has a better chance to deliver in a 7-year portfolio.
This does not mean you need all unique funds for different portfolios. While some funds may be used across goals, it is better to maintain them as separate folios (for each goal) as most online platforms, unfortunately, don’t have the option to invest portfolio-wise. This way, you will have a dedicated corpus running for each goal. The same goes with deposits too, whether you are doing it with a bank or outside.
Tip: The only tricky part here is to get the right combination of investments/strategies for the different goals. While it is not hard, if you find it difficult or want to take cues, check our portfolios to get an idea on how we mix strategies or simply pick one that is closest to your requirement and follow it to remain updated.
Stay with good products
(for those you think buy and hold means never exiting a fund, please read)
Planning and knowing how much to save and choosing the right channels to save is just fourth of a job done. The rest comes from choosing the right products and more importantly staying with the right products. Yes, it is not an easy job and this is where you need help. I am not saying this to boost the advisory community. But unless you stay on top of whether your fund continues to be a consistent performer, you may well lose out.
Had you invested in large/multi-cap/ELSS funds 15 years ago, there is just a 47% chance that the fund you held beat the Nifty 100 index TRI! (Or even worse if one took the entry load then!) So just identifying good funds at the start isn’t good enough. Staying with good funds is more important to ensure your portfolio doesn’t go out of whack. Please read our detailed earlier article on how funds that fall by the wayside can make a real dent to your portfolio returns before you realize it.
You can ensure you stay with right products in two ways; one is staying passive with some index funds and liquid funds because choosing the right products is never easy. This is fine if you don’t regret the additional returns lost by not choosing to invest in good active funds. The other is to have a mix of both – some passive funds to make sure you ride the market and some quality active funds (especially in segments where outperformance is evident) to get that additional 2-5 percentage point return that can buttress your wealth.
Tip: While our Prime Funds can help you choose quality funds with minimal overlap in strategies, our review tool will help you do a periodic quality check on whether your funds are worth holding. We also ensure that we don’t rush into exits at the merest drop in performance. We observe steady deterioration as much as we watch for steady improvements and then take a call. Please note that our ratings are not our recommendation; our review tool is. You can add deposits and ETFs too from our recommended list for passive investing strategies.
(read if you have goals less than 10 years)
Periodically, checking the performance of your investments and exiting or stopping SIPs with slipping performers is a review (section above).
Rebalancing is about reducing exposure to inflated assets and adding to undervalued assets. This will be a practical solution to many of your queries on selling when market is high and investing when it is low. You can’t time the market. But rebalancing acts as a good proxy. You don’t need to know market levels to do this. Here are some simple tips to do rebalancing:
Do (only) an annual review to see if your asset allocation deviates by 5 percentage points or more (this marks a significant rally or fall) from where you set out. If it does:
- First review your funds. If you must reduce equity, use the underperformers to exit first.
- If equity swells, see which category has inflated more (midcap or largecap) and accordingly reduce. When you reduce in equity, add to the other asset class (debt or gold) that has fallen.
- If you have additional funds, instead of adjusting within your portfolio, deploy afresh in the undervalued asset class instead of selling in the over-valued asset. This will also help reduce tax impact of selling units. This is especially useful when you must add to equity after a steep fall like 2008. Please refer to our quick check tip in the top section. There, it makes sense to deploy afresh if your returns are lower (primarily caused by equity). If your returns seem far higher (inflated asset class, likely equity and sometimes gold), then move to the least risky asset class (short term fund or liquid funds) in the portfolio.
We also had lot of queries on rebalancing (as in, moving to low-risk options) as you near your goal. Please note that reducing equity exposure and gradually moving to debt is a risk-mitigation strategy, and is not rebalancing. While it also plays with asset allocation, it does not consider whether your equity is inflated or not. It simply preserves all that you have built till then. Understand the difference.
Tip: It is my view that rebalancing is more important for shorter goals (less than 10 years) and less important for longer term goals. This is because, a fall in equity does not really dent a portfolio too hard after a decade or so, unless it is an outlier event.
As long as you follow our reviews, you will know which funds to add or reduce and that should take care of the choice of funds when you rebalance.
As a parting note, even when you have a planner or advisor, we think you need to follow these in some magnitude or other. And very importantly, you need to make sure you are not misguided into wrong products nor forced to stay with them all through. Taking some onus will ensure you keep your portfolio in good shape and know when to hold them and know when to fold them!
P.S: As for investors who asked for tactical exposures, do look at our Theme Park if you have your own views on segments of the market. But use them only as an addition to your investment and not as a substitute to the primary portfolio. Sometimes, these calls can help make up for underperformance even in the primary portfolio. Of course, needless to say, we will also come up with timely strategies based on market events.