Whose game are you playing?

Imagine what would have happened if Anil Kumble had quit cricket because he can’t hit a hundred like Sachin Tendulkar OR Rahul Dravid stopped playing because he can’t bowl like Kapil Dev? They would have not only ruined their career but would have also missed such a great fan following.

Now imagine another scenario where all the players in the team, instead of focusing on their own strengths start copying others. Ishant Sharma fighting with Virat Kohli to come as on opener so that he can also hit a century and Rohit Sharma fighting to open the bowling so that he can have a good bowling record.

Funny scenario, right? You know what is funnier, that most of the people try to do this with their investments. They try to copy others and their investment strategy. They invest in stocks because their friends or colleagues are investing in them, or they invest in mutual funds because their relative is also investing.

Investments are a personal thing. You need to understand why are you investing, what product are you investing in, what is your investment time frame, what is your risk appetite etc. Just because your colleague or neighbour or friend is taking extra risk and investing his money in small cap stocks/mutual funds / ULIPs, you should not do the same. You should understand what game you are playing. Every individual has his own set of goals and investments should be done keeping them in mind. You should not invest in a product just because your neighbour / colleague is investing. For the sole reason that your goal and risk-taking ability is different from theirs.

Understand your risk appetite, your time horizon, your asset allocation and then invest. It is completely ok if your return on investment is 2% less than your neighbour or if you don’t invest on days when markets are down 5% or you invest in equity mutual funds rather than investing in stocks or invest in a debt instrument instead of equity, if it gives you a goodnight sleep.

People invest in stock market / equity mutual funds with a time horizon of say 5 years but get jittery when stock price / NAV comes down by 5%. If you are an existing investor you must be aware that equity markets are bound to be volatile and there is nothing to be worried about. If you are new to investments then start with Debt mutual funds, gradually move to hybrid products and then to equity funds and lastly if you feel like then sector funds. Stock market have given enough opportunities in past and it will continue to give in future also. There is no hurry to invest. First understand and then invest.

Always remember losses are not made because of volatility in stock market, they are made because of volatility in your mind and that happens when you invest in products which doesn’t suit your risk appetite.

“The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.” – The Intelligent Investor

Asset Allocation

आए तो यूँ कि जैसे हमेशा थे मेहरबान, भूले तो यूँ कि गोया¹ कभी आश्ना² न थे
                                                                                                            -Faiz Ahmed Faiz

1- Jaise , 2-Acquaitance

Faiz may have not thought it this way but this para from his poetry describes the behaviour of our equity market in a very beautiful way. When the bull run starts, markets behave as if there is not looking back and it will continue forever; something that we saw in the last equity rally between 2014-2017. The second line explains the bearish phase which started from 1^st Feb 2018; wherein the markets took a U turn post Feb 2018 and since then we have not seen any signs of recovery.

When the markets are in bullish phase, we stop looking at valuations, corporate governance issues, etc. and during bearish phases we start doubting the best of companies. This happens in every market cycle and will happen in future also. The only way to get saved from this euphoria of getting carried away in either direction is following asset allocation strategy.

Once you have identified your goals and you are aware of your risk-taking ability, decide on an asset allocation strategy and follow that religiously. Asset allocation strategy simply means that dividing your investments in debt and equity depending on your risk profile and how far or near your goal is. For e.g. In a bull run, mid and small caps tend to outperform large cap funds but that does not mean that we move our entire portfolio to mid and small caps. Same way we should not move our entire portfolio in large caps when markets are not in our favour. In equity allocation, your portfolio should be divided between large caps, multi caps and mid-caps. Though one can change the allocation by 15-20% up or down depending on the market scenario; one should never change the entire portfolio.

Same way one should never have his entire portfolio in equity or in debt. It should be a mix of both the asset classes. There is no defined rule for how much equity or debt one should hold as that will depend on each individual but as a thumb rule your debt allocation should not be more than your age. So, if you are 40 years old, your debt portfolio should be around 40%. Again, this is just a thumb rule and will completely depend on each and every individual as per his risk profile and how far or near his goal is.

Its highly risky to keep your entire portfolio in equity as during these bearish phases which we are witnessing now where large caps have corrected by 10-15%, mid cap by 30-40% and small caps by 50-70%; the probability of losing your capital increases. Same way if your entire portfolio is in debt then you restrict your money to grow. For e.g. if your goal is 10 years away, it is criminal to invest in debt funds. For such goals you should invest in equity funds and for goals which are say 2-3 years away one should invest in debt fund. This way you will reduce the impact of market volatility and put your money to best use.

While doing asset allocation considering your risk-taking ability is of utmost importance; followed by your return’s expectations. The amount of risk that you can take depends on your inherent nature and it’s difficult to increase it or decrease it, whatever said and done. It’s easier to invest the way your friend or colleague is investing but seldom we know their risk appetite. When one invests without considering their risk-taking ability, the chances of taking wrong investment decision increases. You will either sell too early or wait too long.

The most important key to successful investing can be summed up in just two words-asset allocation. – Michael LeBoeuf