Posted on Monday, Jan 11, 2016
I wrote “Charlie and his epitaph” three weeks ago, where I recounted Charlie’s approach towards investing and his endless wait for events.
I will never know the correct reasons, but I went back to our years as childhood friends and what shaped our thoughts to find some reasons for Charlie’s behavior.
Is Timing everything?
I concluded that he waited for events because he thought he could time his investments. Some of his timings were brilliant, but many were mistimed. However, over a period the scars from mistiming made him freeze and wait for events than go ahead with his investments. This eventually impacted his portfolio returns and terminal value of his portfolio. I also concluded that because he was a pilot where timing was very crucial, he tried carrying that knowledge of timing into stock markets...it failed miserably.
This appears philosophical, but your experiences in life impact your investment style.
The Chocolate Factory Visit
As children, Charlie and I came back excited from a tour of a chocolate factory which our school had organized. We were amazed by the variety of chocolates in different sizes, shapes and smell. Towards the end of the tour, we were allowed to create our own packet of chocolates to take home.
|1.||Prudent asset allocation|
|Picking the right investments can confuse even the most seasoned investor. A prudent asset allocation technique could have help balance risk and give Charlie’s portfolio much needed diversification. Also understanding his risk appetite would have been very important during the process of asset allocation. Remember risk appetite could be influenced by personal experiences.|
|2.||Invest via SIP|
|Systematic Investment Plan works on the principle of rupee cost averaging & it seems to be the most practical way of investing in the market, in spite of the markets uncertain behavior. This is because, not only Charlie would have saved regularly, but SIP aims to generate returns by leveling out losses that the investment may have sustained in the middle of the term.|
|3.||Think Goals and not events|
|As I explained in my last article it is a futile effort to wait for events, rather Charlie could have focused on his financial goals and aim to achieve them over a long term.|
|4.||Maintain adequate balance in cash|
|First step towards financial planning is to keep aside at least 6 months of expenses as a contingency fund. This would have ensured that Charlie has enough money to take care of his needs in case of emergencies and there was no need to disturb any of his investments.|
|5.||Consult a financial advisor always|
|Planner sheets, calculator or even our articles would have given Charlie a guideline for his financial plan, but for him to chart a plan and consider his financial goals he needed a help of a wise financial advisor.|
|Rate of Returns||No Assured Returns||Fixed Returns for a pre-specified Tenure|
|Inflation Adjusted Returns||Potential for Inflation-adjusted Returns with high risk||Usually Low Inflation-adjusted Returns with low risk|
|Liquidity||Liquid||Liquid, subject to penalty on premature withdrawal if any|
|Principal Amount||Principal at high risk||Principal at lower risk|
|Amount Insured||No insurance provided||Each depositor in a bank is insured up to a maximum of Rs.1,00,000 (Rupees One Lakh)|
Subbu's Solution is authored by I. V. Subramaniam. I. V. Subramaniam is a director of Quantum Asset Management Company Private Limited. The responses expressed here are strictly for information and explanation purpose only. The responses are meant for general reading purpose and not to be considered as an investment advice / recommendation. The responses are not intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or units of the Mutual Fund. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investments. The Sponsor, The Investment Manager, The Trustee, their respective directors, employees, affiliates or representatives shall not be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in the responses.Risk Factors: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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