Last Updated on March 11, 2021 at 12:53 pm
In this article aimed at new investors, we compare managing an investment portfolio with the task of staying married. If you spend some time in an investment forum, you will notice a distinct pattern: members want the best mutual fund to invest in for the next 10 years or 15 years; they want to know the stocks that will do well in the next decade; the best health insurance policy; the best life insurance policy etc.
The only truthful answer to these questions is no idea! No one knows; Insurance purchases are a leap of faith (by both the buyer and seller). A mutual fund or stock purchase (or redemption) is also a leap of faith, at least eventually.
The big advantage of keeping insurance and investment separate is, we can replace bad investments, but replacing bad insurance is difficult if not impossible. Managing an investment portfolio involves several tasks.
Steps in managing an investment portfolio
- Identify the need
- Be clear about when we want the money.
- What is the association inflation?
- Should inflation be a benchmark for portfolio returns? (Yes for 10Y plus goals and no for goals up to 5Y or so and ‘sort of’ for intermediate goals)
- What asset allocation can balance the amount of money we can invest and get a return close to the desired level
- Map out an asset allocation plan
- Identify product categories
- Identify products
Those who have not yet done this exercise and would like to start from scratch: Basics of portfolio construction: A guide for beginners
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
All this is standard preparatory stuff. Many new investors make the mistake of jumping to products, and even those who bother to do a proper goal-planning exercise assume their job is done after they start investing.
Only a few years into a marriage do we appreciate the difference between getting married and staying married. In our desire to find a partner, we tend to showcase our ‘best side’. Only when we encounter the vicissitudes of life together, we appreciate that staying married takes effort, constant adjustment and sacrifice. It is hardly the bed of roses that some newly-wed couples assume it is on social media. And yes, a photograph of a happy couple does not mean they are happy!
Just like a marriage can never be taken for granted and requires constant effort, an investment portfolio also requires constant maintenance. I am not referring to looking at it daily and calculate XIRR five hours after investing!
Regular portfolio maintenance has two aspects: Regular goal-based rebalancing’ appreciating where we are with respect to our goal targets. These are standard tasks.
There are several non-standard tasks, as well. Both can be compared to the effort required in staying married (emotionally wed, not just legally). Even the best-laid plan needs adjustments and ‘play it by the ear’ actions. There could be a few years of bumper returns from an asset class or a few years of no returns. How will this affect our investments?
Sudden changes in tax laws, economic circumstances, income, a sudden drop in performance of a mutual fund or stock etc. All these may require changes in the way we invest. It is quite similar to how a couples bonding evolves: a change in one person may require an adjustment in the other. There is no way to get trained in this. We need to expect it and act quickly.
This is the reason why there is no best stock or best mutual fund, or best investment strategy out there to invest and forget. We can analyse all we want, but future performance is always unknown, and intervention is an eventuality. It is the same as getting married. The data available before a couple gets hitched is most often scanty: Only when we enter the union, we encounter new and surprising facets of a partner.
Of course, goal-based portfolio maintenance can be outsourced to a SEBI registered fee-only advisor. Sadly very few advisors highlight the importance of active portfolio management. Anyone can start a 60% equity, 40% debt portfolio with index funds and PPF. An advisor is not necessary for that. This is the getting married part.
The staying married part is a complete unknown: mistakes are possible in portfolio construction, perhaps even inevitable like a marriage. How the couple reacts to this; how an investor or advisor handles this will define the rest of the journey. In my opinion, a good chunk of the advisory fee is just for this navigation, but many investors are unaware of this, and advisors do not advertise this enough.
In summary, for every hour spent worrying about which insurer to choose, which mutual fund/stock to buy, investors should spend three-four hours learning about how to review these purchases, review their impact on the overall portfolio and understand that investing is a journey into the unknown just like a marriage where success is measured in terms of course-corrections, not destinations.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
About The Author
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.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)