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The more things change, the more they remain the same

LiveMint logoLiveMint 28-08-2017 Atul Rastogi

Amazon is one of the most admired companies in the world today, and Jeff Bezos possibly the most admired CEO. It launched its website 22 years ago in July with the simple headline—“One million titles, consistently low prices”. The company has grown exponentially since then, but the message has remained almost the same—maximum products, lowest prices. Bezos has famously mentioned that his strategy has focused on things that do not change rather than on things that are changing.

Today, everything is changing fast, or so it seems so. The way we eat, live, work and play, is very different from our parents and is likely to be different for our children too. Change is always exciting and certainly creates massive growth and big opportunities.

However, change is easier to spot but difficult to endure, as things which change, tend to keep changing, and keeping up can be tough; more so for businesses and investors. For instance, IT and telecom companies are finding it tough to keep up with the new technologies and regulations, and similar disruptions could happen in medicine and transportation.

Can we apply the same Amazon principle to managing our investments? Let’s look at things from our portfolio which are unlikely to change in our expectations:

(i) we need to beat inflation,

(ii) we need low risk in the overall portfolio, and lower volatility,

(iii) we need ample liquidity for emergencies, and

(iv) we need efficiency and transparency in service. Here I will point that our goals change more often than we realize and hence, purely goal-based investing might cause frequent shift in strategies. Simplicity is also an important objective, so that it is easier to track the portfolio. Ideally, a printout of the full portfolio should come in less than one sheet.

Assuming that the above mentioned things are stable, it is clear that we need a mix of equities for beating inflation, and fixed income for lower risk and lower volatility.

Now, what are the things that will change—the mix of debt and equity, the instruments through which you invest, and the process of investing, including how you take advice or use an adviser.

The right mix will depend on your age, income and risk profile. There are many ways to determine the right asset allocation (mix) available—it can even be done online or with your adviser. Timing can make an important difference in the final returns, especially with equity mix. Timing does not mean trying to sell all at the peak or buying all at the bottom. It means that you reduce your equity allocation as the market becomes more expensive (using standard valuation measures), and raise it as the market becomes cheaper. You might underperform in the near term, but almost always it gives superior returns in the long term. More importantly, it reduces the likelihood of heavy drawdowns (declines) when the market corrects sharply, and thus lowers portfolio volatility.

The right instruments can also change over time. Currently, mutual funds seem to be the best instruments given their high transparency and liquidity. Within mutual funds also, there are many segments, but one must go into the more exotic segments only after understanding the risks involved, and if your portfolio size is large enough. In equity, you might explore small- and mid-cap funds or thematic funds more on an opportunistic or tactical basis.

Within debt, it is better to stick to longer term income funds as gilt funds have high volatility. Short-term or liquid funds give lower returns. There are more than 5,000 funds in India but you need only 8-10 funds. It is important to choose a fund that fits in your portfolio, and not run after the best performing fund.

New instruments are also gaining popularity, like exchange traded funds (ETFs). These have lower costs and high liquidity. But these are still at a nascent stage in India, and should only form a small part of the portfolio. Costs of investing have been coming down and are likely to decline further given the increasing scale of industry in India and regulatory pressures.

The other thing that is changing fast is how you invest. The traditional model of agent or distributor is being challenged by regulation and technology. The transactional end is fast moving online, with new platforms cropping up every day which can transact at a fraction of the time and cost. Even the advisory part is rapidly shifting online, with algorithms replacing physical advisers. But what is unlikely to change is the assurance that most investors need that they are on the right track. There are bound to be periods of volatility where the portfolio falls or underperforms.

Most investors tend to react in haste altering their strategy significantly. But the ones who remain calm or use that volatility as an opportunity come out better. In such times, a helping, reassuring hand will make the difference. Such help was required earlier, and will continue to be required in the future as well, despite the availability of knowledge and resources. In an age of ubiquitous knowledge (too much noise), the ability to keep one’s focus will be more critical than an analytical ability or information.

Atul Rastogi is a Sebi-registered investment adviser, and founder of www.ardawealth.com

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