The freefincal journey has taught us several lessons about human behaviour. Formoremost among them is what most investors want without stopping to recognise that it is impossible!
We can restrict ourselves to investors and not savers. That is, we only discuss those invested in the capital markets directly (stocks, bonds) or indirectly (mutual funds).
So what do these investors want?
- They want names of mutual funds that will work in future.
- They want the right set of funds or stocks to hold for the next 10 years or 15 years.
- They expect fund or stock recommendations to never go wrong*
- They want a portfolio mix that is superior to others and will work well in future.
- They want an investment strategy that will not fail.
- Once they have set a return expectation, they will not lower it.
- They don’t want any confusion. They need to be told in simple words, “buy X fund and follow Y strategy” and that is that.
* Some “experts” gloat if their recommendations go right but do not assume responsibility when they go wrong. It is perfectly fine to be angry with such people. This is why our disclaimers do not take credit for gains. See for example Handpicked List of Mutual Funds Apr-Jun 2022 (PlumbLine)
The book of financial literacy has several chapters. One of which is, “We don’t know”.
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- What return can I expect from equity over the long term? We don’t know.
- What return can I expect from gold over the long term? We don’t know.
- Will X active fund work better than Y index fund? We don’t know.
- Will X tactical strategy work better than Y systematic strategy? We don’t know.
- Can I use X combination of passive funds instead of Y combination of passive funds? You can but we don’t know which will work better.
- ….
Take for example how readers reacted to my posts on Nifty Next 50. Every time I mention it or recommend it, I always say it is risky. When I recently discussed its recent performance and said, “stay if you can be patient or exit”. Many interpreted it as a recommendation to exit and that I have changed my stance on Nifty Next 50 (I have not). See: Is it time to exit from Nifty Next 50?
Nothing has changed in the index! When you see a bunch of long-term rolling returns, you will see a max return and a min return. Some will be good returns and some will be not so good returns.
After you start investing in Nifty Next 50, one particular sequence of returns will impact you in a good way or a bad way. No one knows which! You will have to take the call after periodic review if you are willing to keep your faith in the index or not. No one can help you here.
The same is true for a financial advisor too. They recommend something and if it goes south, they have to change course. As mentioned above, this is why those offering investment advice should not feel superior if their calls go right because the tide is likely to turn sooner or later.
When we mention the “we don’t know” chapter in the financial literacy journey, many are appalled. “If we don’t know anything, then what is the point of investing?” is a response often heard.
If we think about this a little deeper, many of the far more important choices we make in life also come with no guarantees that they would work! Our choice of career or who we marry for example. Yet we go through them because we know that we have to make our choices work by taking nothing for granted.
Why should investing be any different? No one with a conscience can offer the one choice that is sure to work out of a myriad of choices! We will have to make a decision based on our experience and re-evaluate our choices periodically based on performance and personal circumstances. We will have to stop looking for validation of our choices because no one can do that.
Ok, what is that we can do? Accept the “We don’t know” part. Appreciate that we cannot know. Some experience will teach us that We don’t need to know!
Amidst all the uncertainty we can still have a reasonable target corpus for a specific goal and try and reach as close as possible with periodic reviews. This includes rebalancing, fund/stock performance evaluation and replacements as necessary.
If inflation decreases and rates fall, we redo the financial planning calculation with lower return expectations. If a fund has not been performing well for long (as in years) and it bothering us, we replace it with something more acceptable. Just that too many replacements or inclusions are not productive. There is no harm or shame in changing stance.
Personal money management is 50% planning and 50% playing it by ear. Without that 50% planning, there will be no reference point or template to play it by ear.
Investors want things that work in future not because they believe it is possible, but because they have a fear of making mistakes. Just like in life, in portfolio management too, you live, you learn and then you live some more. Rinse and repeat.
Let us train ourselves to make mistakes, but with personal benchmarks (aka goal-based financial planning) so that we can correct them and make different mistakes on our journey to financial freedom.
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Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
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