Last Updated on January 13, 2016 at 6:40 pm
Investing for long-term goals is governed by the following tenets.
1) Beat inflation either by investing more and/or with adequate exposure to volatile but productive assets. Preferably ‘and’, not ‘or’.
2) Understand the importance of containing volatility and that trying to maximise returns by being more aggressive is like trying to run a marathon like Usain Bolt.
3) Knowing how to contain volatility.
a) never ignoring debt. Not more than 50-60% equity exposure is needed for any long-term goal.
b) having the maturity to diversify the folio among productive asset classes and within each asset class
c) having the maturity to periodically shift gains from a performing asset class to a meek if not underperforming asset class. Also known as rebalancing.
I am convinced that investors, especially the young earners, must keep things as simple as possible and avoid portfolio clutter like the plague.
For most people, the best way to diversify a portfolio within an asset class is by not trying! If they don’t know what they are doing, this is what happens:
Here are a few long-term (15 Y plus) portfolio ideas that are minimalist in nature. All of them are likely to produce a real-return to the disciplined and un-wavering investor.
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Be warned that, none of them will work
- if you expect anything more than 12% CAGR (I prefer 10%) from the equity or equity-oriented component.
- if you jump up and down each time other funds do better than yours.
- if you think having more mid and small-cap funds will fetch you more returns because your goal is far away.
Minimalist Portfolio 1
- Single Large Cap mutual fund (60%) + PPF (40% only!)
Core and satellite principle be damned. Solid large caps will be relatively less volatile. Size of the fund does not matter as large caps are liquid stocks.
Minimalist Portfolio 2
- Single Equity-oriented balanced mutual fund
My favourite for the following reasons
1) Tax-free debt component.
2) Automatic rebalancing
3) Fund return = portfolio return. Goal tracking is the easiest.
4) Most liquid portfolio of them all.
5) The equity component could be diversified too
Minimalist Portfolio 3(a)
- Single Large and Mid-cap fund (60%) +PPF (40% only!)
For those worried souls who long for mid-caps. Some have a touch of small-caps too!
Fund size could be an issue. Larger the fund, the more large cap it becomes in nature.
Minimalist Portfolio 3(b)
- Single Large Cap mutual fund (60%) + PPF (40% only!)
or
- Single Large and Mid-cap fund (60%) +PPF (40% only!)
The fund in this case has exposure to international stocks.
Robust diversification. Solid long-term returns but with the short-term impression of being a laggard (diversification requires maturity)
~~~~~~~~~
Down the line, a debt mutual fund can be added to the above portfolio to aid rebalancing. Initially, one-way rebalancing, that is shifting excess equity allocation (say 5% or more) to PPF is more than enough.
If you are starting to invest for all your long-term goals at the same time, a unified minimalist folio will do the trick. If there is a gap of a few years between the investment for each goals, you can construct separate minimalist portfolios for ease of tracking and rebalancing. A unified folio could also work, but tracking the corpus of each goal can be a pain.
Individual minimalist folios allow independent risk management. A 25 year goal is not the same as a 15 year goal. I would prefer to rebalance more often for a 15 year goal.
That is it. Don’t chase after that hot mid/small/micro cap fund.
Keep it simple.
Avoid portfolio clutter like the plague
Consider a minimalist portfolio:
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