Consider current portfolio before seeking the next good product to buy

Investors who like to move away from a 'product-oriented' investment style are clearly seeking change. Several of them do not want to mindlessly add IPOs, NFOs and insurance products to their portfolio. They are also unwilling to use stock tips to trade or buy. They like a more structured approach to building their wealth, and are in search of trustworthy advisors who can help them. Such advisors, however, are in serious short-supply. Most are still product-pushers, and several do not conduct themselves in a manner that would inspire trust in the mind of the committed, long-term investor. If they read (and depend on) do-it-yourself manuals themselves, how could they be entrusted with someone else's wealth?

First, investors need to define three critical parameters for their wealth. One, the return they are targeting; two, the maximum downside they can bear while chasing the return; and, three, the time they are willing to give to their wealth. There is no need to adopt a textbook approach of defining a goal, measuring it, and working out complex algorithms to estimate the needs. The definition of return is important, since it helps deciding how a portfolio should be planned. The risk, simply measured as the maximum downside, indicates the realistic ability and willingness to bear losses.

Time, too, is vital: Risky assets can be used to build wealth, thus averaging out the return and risk over a period. It is also important to have time on one's side. This to make benign mistakes, that may have been otherwise made in creating a portfolio. It is also critical to be realistic. Targeting, say, a 14 per cent return with a maximum of 20 per cent downside, over a period of 10 years is a realistic and reasonable goal. These numbers will, of course, vary, depending on the situation of the investor, but defining them is the first critical step.

Second, investors should seek a diversified portfolio that is not over-concentrated in one type of investment. Several tend to blindly invest in property, seeing it as an appreciating asset, created by the disciplined payment of equated monthly instalments. This leads to the accumulation of a wealth whose benefit is seldom enjoyed. Investors typically do not sell property, reluctant to let go of what they see as an investment success. This emotional attachment renders the asset useless to them.

It is important to consider bank deposits, public provident funds (PPF), gold, property, equity and debt mutual funds as components of the portfolio, carefully put together. Investors fail to take a holistic view of their wealth, often focussing on deploying the marginal surplus they have in the present. One can never go wrong with a diversified portfolio, and it is critical, too, to consider an allocation in line with the return, risk and time parameters. Without growth assets such as equity and property, 14 per cent is not, for example, a feasible return. There is no need for complex optimisations to arrive at the portfolio. A mix of 50-60 per cent in growth assets such as equity funds, property and gold, and 40-50 per cent in stable assets such as deposits, bonds and PPF should be adequate.

Third, investors should have an investment strategy in place to implement what they have planned. Most investment decisions remain on paper. Investors often seek the next good product to buy and fail to see what they already hold. Such an ad hoc approach seriously hinders the portfolio's performance. Mindless buying of insurance policies to save on tax is the most commonly made mistake. It reduces portfolio return and liquidity. Investors do not apply themselves seriously to implementation strategies, since they think this involves complex decision-making about timing the markets. Sticking to the allocation and making routine and mechanical investments as and when investible surpluses are available is adequate. The portfolio will do just fine, since it is being built to a plan. Just as we ensure a basic diet and exercise routine to keep good health, we could build a commonsensical investment plan for our wealth.

The writer is MD, Centre for Investment Education and Learning