Focus On Portfolio Returns, Not Individual Investments


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Insurance Policies Planning , gold, etc. This way, they ensure their downside is well protected, while expecting super normal returns from miniscule equity allocation.


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Focus On Portfolio Returns Not Individual Investments For more than a decade now we have met different types of clients some conservative moderate and aggressive investors. Some wish to focus on short term goals while others have medium term and long-term goals to take care off. In this diverse group of investors when we looked at portfolios of our newly on- boarded clients we noticed a common trait. Investors were concerned more with

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their equity portfolio rather than their entire portfolio. The rationale being “Equities are risky it can erode capital or/and enable wealth creation. The rest of the portfolio is fairly safe so why worry about it.” That’s reasonable justification indeed isn’t it This phenomenon is well explained in the Loss Aversion Theory where for the same quantum of money investors feel 2.5 times more psychological pain when losses are incurred compared to gains. Naive investors have designed home-made Risk management tools for this purpose. In most cases they maintain very low allocation to equities ranging from nil to 5. The balance portfolio is invested in safer instruments which include Fixed Deposits Postal schemes Insurance Policies Planning gold etc. This way they ensure their downside is well protected while expecting super normal returns from miniscule equity allocation. With such actions naive investors are shouting out loud “We need investment advisors to guide us.” Think about it an investor is excessively obsessed with

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performance of only 5 of the portfolio taking 95 of the portfolio for granted. Is this behavior rational or irrational In such a portfolio 95 of the portfolio will deliver approx. 7 returns while return expectation from equities will be plus 12 to 15. If projections meet reality such a portfolio will deliver meager 7.45 returns which cannot beat inflation in the long term. Investors need to allocate their investments in different assets as per their goals and time horizon. For example if they have a Financial Planning goal which is 7 to 10 years away then the allocation to that goal should be in equity as over that period equity volatility gets moderated and returns get enhanced. For short term horizon investors should look at fixed income assets which provide safety of capital. In the endeavor to earn huge returns in short term from equities investors may take too much risk relying purely on luck to get the desired results. On the contrary if investors focus on Asset Allocation whereby they invest as per their goals and risk profile from a long-term perspective their investment journey will be way more pleasant. For example if you have 40 equity and 60 debt having reasonable return expectation of 15 from equities the portfolio return is likely to be close to 12. The major difference being we are not betting in equities but investing in it for the long run. Conclusion Investors stop betting on equities with miniscule portfolio allocation it is not going to help much in the long run. Use suitable Asset Allocation which enables you to worry lessand reap the rewards in the long run. Simply put when the whole portfolio works hard for you the results are likely to be better than a portfolio where only a small portion works hard. The choice is yours Read More: SEBI Registered Investment Advisor l Planning for Early Retirement

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