Whenever I share my investment portfolio in annual audits or other articles, readers ask about my investment strategy. See, for example, “17 Years of Mutual Fund Investing: My Journey and Lessons Learned.”
“How did you select the funds you hold?”, “How do you decide when to exit a fund?” and so on. Others are angry that I hold active funds in my portfolio while recommending index funds.
I have addressed holding active funds in detail before: Why are you recommending index funds when your portfolio has beaten the market? I am glad that when readers see how often my portfolio has underperformed the index in the past, they are convinced that indexing is the way forward for them.
I have a huge portfolio and cannot switch from active funds to index funds on principle, as that would involve tax and exit loads. Even if I start investing anew in index funds, it will take more than a decade to gain considerable weight compared to my active funds. So, I will only be cluttering my portfolio.
I recommend index funds to others so that they avoid repeating my mistakes. And that is what my portfolio is – a sum of all my mistakes made over the years. As I look back, I cannot think of a single intelligent, well-analysed choice.
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My first fund was the Sundaram ELSS Fund Dividend Option! I was not aware of the distinction between a growth option and a dividend option at that time. I just started with what my insurance agent (who also sold MFs) asked me to do.
When I started to DIY (this was before the advent of direct plans; I still had to buy regular plans “directly” from the AMC), as far as I can remember, all my investment choices were based on star ratings – I was yet to appreciate the most important rules of capital market investing – (1) past performance has little to do with future performance and (2) What’s past is prologue (Shakespeare in The Tempest).
When I started learning more about risk, I learnt about the importance of balanced funds (now called aggressive hybrid funds) and started leaning towards them.
When Parag Parikh Flexicap Fund was in the NFO stage, I remember my friend (whose opinion I valued a lot) write on Reddit about how unique it was with respect to its investment strategy. So I took a chance with it. The most important element I valued in the fund was its low volatility.
From 2013-14 onwards, I started consolidating my portfolio. The aim was simple. Do not buy new funds unless you have a good reason. So my portfolio is the residue of past mistakes. And if I have a “strategy”, it is simply to do nothing and not fix anything that is not broken.
My portfolio was never well-designed or well-diversified. It was and is cluttered. I have learnt to live with it and realised the importance of inaction once your basics are in place during the accumulation phase.
Instead of worrying about performance and returns, I focused all my energies on how much I can invest and how much I can increase this investment month by month. That has been the key driver of portfolio growth. See: Increasing investments each year is essential for financial freedom.
I want to think that after hours and hours of staring at data, I have attained some semblance of wisdom – “stop tinkering with your portfolio. Leave it alone to grow in peace. Even sub-optimal portfolios do well if left alone (with the basics like asset allocation and goal-based investing in place)”. Also see: Eight investment truths hours of number crunching have taught me.