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
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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.