Asset Allocation: The magic mantra

Markets rise and markets fall. Industries and sectors come and go out of focus and attention. Hot shot companies and their share prices see insane growth and then loose it all while some other “new” favourite hogs all the limelight.

The stock markets look like a super crazy place where even more super crazy people do their extreme crazy stuff and lose money or make money. It is not so when we are inside. We realise the best brains in the world, the actual super creamy layer amongst us have made their work place here and ply their super brainy stuff either selling ideas and companies or buying these.

So what should we do to make our future secure by doing our “chota-mota” investing. The media definitely is of no help because for them the job is quite clear – sell media space or time. Obviously even expecting our financial well-being can’t be expected to be on top of their corporate KRA. Our bhai-bandhus (well meaning as they are, of course) would suggest as per their success and never as per their failures – so take that advice from them with a pinch of salt. So where does that lead us to?

Allocate. The magic mantra. Each of us have requirements that are unique and just saying we want to retire rich or make a lot of money is not really putting the thinking caps on as far as retirement goals, wealth accumulation targets and financial goals overall is concerned. What really needs to be done I to find out where we are and then describe well where we want to be. And only after do we have the ability to plan a route to trave from here to then. Remember there are many options for making a road map but each route map will come with their own limitations and time frames. What are the limitations? Liquidity, volatility, predictability are all clear and present dangers. And they exist in every savings and investment decisions we make. So, what’s the cure?

Allocate. Amongst the various asset classes. What are the asset classes that we popularly have access to? Stocks, bonds and cash are the obvious choices. Gold (read precious metals) is an eternal favourite. Real estate is one more. Global assets. Hedged portfolios and fancy sounding investment solutions are others. Whimsy based options like water, wine, dirt, watches, paintings, even period furniture makes entry into some individual portfolios. There is no end to options. But remember, no one has a crystal ball which lets one to look into the future and quote a figure many years from now. Even the Federal Reserve head knew nothing of the financial crisis before it happened and neither did the COVID happen with the knowledge of the global leaders. Closer home even the auditor of Satyam had no inkling of what was happening under there noses. When a liquor baron flew out of the country, I am sure he did so without throwing a farewell party. So where does that leave our bhai-bandhus and their network of brokers, advisors and what have you?

Allocate. Each savings/investment vertical comes with its own growth rate and liquidity and degree of their opaque environ. Choose well between them but if you were to ask for my advice, I tend to put liquidity far above every other quality. Having lived through more than 5 melt downs in my life in the markets covering nearly 30 years in the money managememnt and advisory business, this is one truth that I keep on giving out as the most important factor. Check to see where the growth rate compounds and there is no expense which does not compound. So, act accordingly. Check out those that have lesser predictability over time and stay as far away as possible from speculative activities. Expect less than super normal returns and check your investments to ensure they are making or hopefully bettering the nominal GDP growth rate i.e. the real GDP PLUS INFLATION. If these happen over time then rest assured that this is what will set your financial plans on a high and enable you to meet your long-term needs. In the short run what you make is rather luck than engineering.

Happy investing and may the festive season bring joy to each one of us.

Prasunjit Mukherjee