We were going through our portfolio, as it happens before filing income tax and deciding what we shall do for next year. I proposed that we modify the asset allocation towards debt. After 33 long years. “Did it not change with asset class performance,” asked the husband. “Yes, it did, but we did not change it,” I replied. Strategic asset allocation is not driven by the market’s existing position, where it might go, or what others might be doing. It is completely inward-looking. We both went to work in 1986 and began to save seriously in 1991. We have always held most of our assets in equity, with a small allocation to debt.
Why did we not have a bigger allocation to debt? We did not need income from our investments. As salaried employees, we were the income -earning assets of the household. The Provident Fund, to which we both contributed, was already investing primarily in debt or income-yielding instruments.
There is another reason to allocate to debt or income assets in the portfolio. If the equity markets were to crash and we were in need of money, we could be stuck. Since PF was not liquid and easily drawable, we needed some bank deposits.
The third reason was the risk of equity markets. How did we deal with the market crashes? Did we panic and worry about the falling value in our portfolio? We would have needed debt as a buffer if a fall in the market value of our equity portfolio were to give us sleepless nights. However, we were quite fine, and when we look back, we think of 1992 with a smile on our faces: it was a time when the Sensex crashing from 4,500 levels had been a source of all-round panic. Salaried folks like us had it better.
Our strategic asset allocation was driven by our need for growth in the value of our investments. Therefore, equity, and later equity funds, were our primary vehicles of investment. This did not have to change when our needs remained unchanged.
Why is it changing now? I no longer hold a salaried job. My husband will retire in a few years. It is now time for the investment portfolio to generate some income and, therefore, a gradual shift to a higher allocation to debt is needed. Without the buffer of our own incomes, our ability to take market crashes also comes down. Age contributes to that orientation too, when one wonders if one would live long enough to recover.When close friends and relatives ask how we manage our money, they find it intriguing that we don’t do much. There is really not much activity in the investment portfolio. What is the annual review about then?First, we ask ourselves if anything is likely to change with respect to our needs. Is there an upcoming large expense that requires us to draw on our investments? We make a broad cash-flow projection and, if regular income is unlikely to meet these needs, we go for investments that need to be liquidated. We choose not to borrow, even if we can.
Second, we take a look at market forecasts and projections, and ask if any asset class looks poised for some dramatic action. We enjoy a small bit of tactical positioning, but we don’t overdo it. The reason is simple. In the many years of review and tactics, we haven’t managed to beat the markets. The markets have beaten us more. We might keep the money in the bank for a while, to take an opportunity that looks attractive, at the most.
Third, we take a look at our holdings and decide which ones must go. It is our understanding that we may not always pick the best stocks and funds, but we have the power to sell what is not working. That is the clean-up we do. As long as we throw out what is not working, we believe we will manage fine.
Fourth, we make an investment list, which we call the default list for the year. It has both, what we already hold and anything new that we like. All savings for the year go into these products. Even if anything new has made an appearance in the market, it has to wait for our next annual review to be in the reckoning for our portfolio. We are not too excited about the new, as we have no problem buying more of the same that we already hold.
Fifth, we decide what comes in the ‘do nothing’ category and why it must remain there. We may want to let an underperforming fund remain for another year; we may renew a bank deposit; we may postpone selling the house we no longer live in. The reasons can be many, but we discuss and note it down. Sometimes the mere chore of getting something done is demotivating. We cut ourselves some slack and decide to come back to it later.
Sixth, we ask if we are spending or saving too much. We take a look at the saving and spending ratios with respect to the annual income. If the trends have changed compared to the previous years, we like to know if that is a conscious decision for the upcoming year, or if we are just being uncaring about it. In our initial earning years, the problem was that we saved too little. Now, with age, lower responsibilities and minimalistic lifestyles, we seem to be saving too much. We review the charities and donations; we speak about big-ticket expenses that we failed to make; we consider the capital expenditures. We finally agree what we will do this year.
Let me return to where we began. Asset allocations don’t have to dramatically alter every year, unless something dramatic has happened to our income-earning abilities. Despite all the noise about actively managing this and that, a simple passive style that allows the investments to run undisturbed, delivers quite well, in our experience.
More importantly, it frees for us the time, energy and effort to focus on what we can do to earn and enhance the income; to enjoy our rest and recreational activities; to pursue the interests and hobbies that we love; rather than spending a lot of it on managing the investments.
(The Author IS CHAIRPERSON, CENTRE FOR INVESTMENT EDUCATION AND LEARNING)