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Asset Allocation

The Search for Investing Nirvana

Investing can be pretty simple and yet we assume simple isn’t good enough and keep searching for elegant solutions even if they are complex and have risks of an unknown nature. Free is discarded in favour of paid solutions even though the free ideas may have as much value as the paid ideas.

We are a product of our beliefs and biases and no matter what others say, we refuse to cow down and accept that maybe we are looking at the wrong direction.

In 2003, I had amassed enough money to become a broker at a regional stock exchange. Since at that point of time, I was also looking at investing the same into Real Estate (specifically a house), I have always wondered how life would have evolved if I had followed that direction than the one that led me to markets, full time.

While the business barely broke even even after a decade, no thanks to lack of my marketing skills, Real Estate took off like no other. But here is an interesting thought that came about when I was having a talk with a good friend of mine.

We both have been in markets for more than two decades and yet, neither of us had even invested into mutual funds – either lumpsum or systematic investing. Its not that we didn’t know of the advantages, my family first big non UTI mutual fund investment was in the year 1994.

Yet, our beliefs in our own abilities made us invest directly and while some investments worked, some didn’t, I for one never came to create a portfolio of a size that I could have had by just investing a small sum regularly. I didn’t have to buy the best fund or the second best one, all I had to do is get that nudge to invest a small sum and forget about it.

My friend wondered what if we had invested a small sum of money in funds managed by others. While returns may be more or less depending on the fund we invested, the fact would have been that we would now be the proud owners of a few millions and all this without any effort.

As he recounted this old joke,

There’s an old story about a guy taking a smoke break with his non-smoking colleague.

“How long have you been smoking for?” the colleague asks.

“Thirty years,” says the smoker.

“Thirty years!” marvels the co-worker. “That costs so much money. At a pack a day, you’re spending $1,900 a year. Had you instead invested that money at an 8% return for the last 30 years, you’d have $250,000 in the bank today. That’s enough to buy a Ferrari.”

The smoker looked puzzled.

“Do you smoke?” he asked his co-worker.


“So where is your Ferrari?”

Many of us don’t smoke or drink, but do we really have saved more than those who spend money on such activities? There is always something else that catches our fancy and attention and onto which we would have very likely spend the money. Knowing is not the same as Doing.

On Twitter, I see financial advisors ridiculing people who invest in a large number of SIP’s. The CEO of a fund house has multiple times commented that by investing in one too many a fund they will earn nothing more than the market.

But I think what is being missed out here is the fact that, what if they aren’t really looking at beating the markets in the first place. What if the rationale for them investing in ‘n’ number of funds which has a large over-lap is to ensure better sleep at night?

Assume you have a Crore of Rupees and wish to invest in the Debt market, specifically Liquid Funds. Liquid fund returns of most fund houses are close to each other which means that you aren’t likely to do better by trying to choose one over the other.

Given that info, would you feel comfortable investing all the money in one fund or deploying the same in multiple. When the basic objective is to park money that can grow safely, would you try to maximize or diversify and ensure sounder sleep even though returns maybe a bit less or more than what you could have achieved otherwise.

If maximization of returns is your requirement, you are better off investing directly in stock versus mutual funds since you may by pure chance be invested in a stock that shoots off like nobody’s business providing you with riches you didn’t dream of obtaining.

Dynamic / Tactical Asset Allocation is a very new idea. But for long term performance, do they really add value or are they just bells and whistles that are nice to speak about but imperfect when it comes to applying them in real life?

Harry Markowitz won the Nobel Prize in Economics for his pioneering work in Modern Portfolio Theory and yet when it came to his own asset allocation, went onto allocate it equally between Equity and Debt regardless of the wonders he could have achieved by just following his own strategy.

We keep searching for the best mutual fund and the top fund of this year is not the same in the next year forgetting that simply investing in the cheapest ETF can over time maybe provide as much returns as all the constant churn would provide.

In the past I have been critical of blindly sipping into mutual funds. But thinking on lines of this being a nudge to save, a SIP in expensive markets is better off than having no SIP for we are unlikely to save the money elsewhere and instead spend in on things we may not cherish the day after purchase.

On the other hand, those who SIP forming estimations of grandeur returns thanks to historical data are likely to be disappointed as well.  SIP is a nice way to shove money into savings that may otherwise end up being spent. Will it really help you take the Trip to Europe is a different question altogether.


One Response to “The Search for Investing Nirvana”

  1. Nice article…

    Posted by Ahajoy Sreenivasan | 21st June 2018, 12:30 am

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