How I manage my money using the unified portfolio approach

Published: July 29, 2021 at 8:08 am

Last Updated on July 10, 2022 at 8:18 am

In this article, SEBI registered fee-only advisor Swapnil Kendhe explains why and how he uses the unified portfolio approach (one portfolio for all goals similar in duration) to manage his money and that of his clients.

About the author: Swapnil is a SEBI Registered Investment Advisor and part of my fee-only financial planners’ list. You can learn more about him and his service via his website, Vivektaru. In the recently conducted survey of readers working with fee-only advisers, Swapnil has received excellent feedback from clients: Are clients happy with fee-only financial advisors: Survey Results and 685 investors rate their experience with SEBI registered fee-only advisors. This is his story: Becoming a competent & capable financial advisor: My journey so far.

His previous contributions:

The unified portfolio approach is a less used approach to financial goal planning. Some experts consider it suboptimal to the individual goal portfolio approach based on the view that asset allocation should vary for different goals with different time horizons, unlike in a unified portfolio. I like the unified portfolio approach more. The individual portfolio approach is too structured for my liking, and it leaves little room for the unexpected.

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What follows is the description of how I manage my money, which is a form of unified portfolio approach. This article doesn’t cover all aspects of the unified portfolio approach. I will write a detailed article on it someday. I don’t also want to argue for one approach over the other, to each his own.

The purpose of financial goal planning is to ensure that we have enough liquid assets available at the time of need. In a unified portfolio, we have to maintain enough liquidity in non-volatile products to take care of our financial needs over the next 4 to 5 years. Here is what I do.

Say my short-term goals with my best guess of the amount required in present value are,

Emergency Fund               – 10 Lac

Car Purchase after 2 years – 10 Lac

So I need 20 Lac liquidity in the portfolio for these goals. I can have all the 20 Lac parked in debt funds or fixed deposits or a combination of two. I would not keep my emergency fund parked separately in a separate product or use a different product or folio for a car purchase goal.

There could be two scenarios. I could have less liquidity in the portfolio (Cash, FD, Debt/Arbitrage Funds) than required for my short-term needs, or I could have more liquidity than required.

If I have 15 Lac liquidity in the portfolio, I can calculate monthly savings required to create required liquidity by using back of the envelope calculations.

The amount required for short-term needs – a20,00,000
Available liquidity in the portfolio (Cash, FD, Debt/Arbitrage Funds) – b15,00,000
Gap – c (a-b)5,00,000
Months till the farthest goal – d24
Approx. monthly savings to be allocated – c/d21,000

In this case, I will allocate 21,000 from my monthly savings every month to create the required liquidity in the portfolio. My balance monthly savings would go towards my long-term portfolio.

If I have 30 Lac liquidity in the portfolio, the excess liquidity of 10 Lac becomes part of my long-term portfolio.

Amount required for short-term needs – a20,00,000
Available liquidity in the portfolio (Cash, FD, Debt/Arbitrage Funds) – b30,00,000
Excess Liquidity – (b-a)10,00,000

I now calculate the asset allocation of my remaining financial assets and try to keep the allocation closer to my target allocation. Excess liquidity in Cash, FD & Debt/Arbitrage Funds becomes debt part of my long-term portfolio besides the amount in other debt instruments like PPF.

You can call it a two portfolio approach if you like. But it is a single portfolio, just that I set aside the liquidity required for short-term needs before calculating asset allocation of the portfolio. It is easier to manage the asset allocation of the unified portfolio this way.

I don’t worry about the savings and investments I make every month. I live a simple and frugal life. My savings rate is good, and I know I earn and save enough to achieve all my financial goals. My focus is more on improving my craft as a financial planner and doing as well as I can professionally, without sacrificing my intellectual growth, health and happiness.

I have no emotional need for early retirement or early financial freedom. I don’t find early financial freedom worthy enough ideal to let it become an all-consuming desire in life. Even when I achieve it, I am unlikely to feel any sense of achievement. I want to work till my body allows me to work.

The corpus I accumulate shall determine my lifestyle in retirement and the money I shall spend on goals like my kid’s higher education and marriage. My kid will get the education I can afford. I will not put in extra effort to afford expensive education for him. I don’t want to remove all stressors from my kid’s life. I will do what I can. He will have to figure out the rest.

I am likely to accumulate more assets than I need for my financial needs unless something goes terribly wrong with my health. If I die early, insurance will take care of my family’s financial needs.

I was broke at age 29 and had a negative net worth till age 32 thanks to a failed business I did after leaving the job at age 26. I was in such a financial mess that I lost my wedding ring to a gold loan. My mother lost her gold to bail me out of a loan I took at 10% monthly interest. I do not consider taking this loan a mistake even today. I did what I could to keep my honour and commitments. I will be 36 this December. One advantage of surviving a long period of negative cash flow, low income, heavy debt, and ultra-low expense is that I feel more secure and in control of my life than many of my clients, with 10 times my assets.

For the asset allocation of my long-term portfolio, I use Benjamin Graham’s asset allocation framework. Benjamin Graham recommends never keep less than 25% or more than 75% of financial assets in equity or debt, with the simplest choice being 50-50 proportion between the two. He recommends rebalancing the portfolio back to target if the allocation moves more than 5% from the target.

My equity allocation in the long-term portfolio is 60%. (Don’t run 60% equity in your portfolio just because we are in a similar age bracket. Equity allocation depends on your life situation, financial situation, risk tolerance and your experience of handling equity in the portfolio.)

I use my new savings to keep allocation closer to the target. I use index funds for equity allocation. I do not have a single rupee in stocks or actively managed funds apart from a small part of my portfolio locked in an ELSS and NPS.

My current equity portfolio is Nifty: Next50:S&P500 65:15:20. I am unwilling to spend a significant part of my life trying to beat the market. Index funds free up hundreds of hours of time for me every year. I use this time partly doing financial planning work that earns me additional revenue and partly exploring other things in life that interests me more. In the larger scheme of things, my equity portfolio beating the market has no importance.

For the debt part, I use PPF (My PPF account and PPF accounts of my wife and parents) and hold some liquidity for rebalancing in Liquid Fund and Corporate Bond Fund.

I have 10% of my long-term portfolio in Gold. I am not fully convinced of the gold allocation in my portfolio. I am just taking a middle path of Warren Buffett’s distrust for Gold and Ajit Dayal’s 20% Gold allocation until I form a concrete opinion about it.

At some stage in the future, some of my bigger long-term goals, like higher education for my kid, would become short-term goals. I will start creating liquidity for these goals 4 or 5 years in advance. My income could also be healthy enough to finance these goals from my regular annual income.

If there is any gap, I can take out the amount from my long-term portfolio. If equity has given good returns in the recent past, I can take out the money from equity. If equity markets are depressed, I can take it out from the debt part. Under normal market conditions, I can even take out a part from equity and a part from debt in the proportion of my target allocation.

Would I reduce equity allocation as I inch closer to retirement? I may not need to. My portfolio could be big enough to not worry about reducing equity allocation. I had a client who had 70% of his financial assets in equity at age 65, and we decided not to reduce equity allocation in his portfolio. The size of the financial assets of his portfolio was 110 times his annual expense. This meant that even with 70% equity, he had 33 years of his annual expenses in debt assets. He may never need to use the equity part of his portfolio. His children will inherit his equity portfolio like he inherited his father’s.

There is a risk of getting anchored to saving fixed amounts every month for individual goals in the individual goal portfolio approach. A unified portfolio gives me freedom. I have an investment philosophy. I save and invest what I reasonably can. I will make adjustments as life happens.

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