The year 2018, especially the period after July, has come as a welcome reminder to investors who have been investing since the beginning of this decade and also to the investors who have been investing over the last five years. The volatility noticed in this year and the drawdown in the portfolio has left investors stumped. And if one has started investing only in the last 6-18 months, the losses in the portfolio has jolted one’s confidence in the investment product, the advisor recommending the product and also the schemes.
If it is a goal-based investment with a multi-year time horizon, then volatility is your friend. You are in the ‘accumulation’ phase of the investing journey—the sweet spot. Now, if this volatility is making you uncomfortable and more importantly, making you lose your sleep, what you are looking for is not goal-based investing. It’s more of volatility investing.
In the investing journey, especially, in the asset class of equity, to expect a linear return at all times like fixed income is a difficult ask. The portfolio can go south (be in red) multiple times, during the investing period. That is where you need to understand whether you are investing for returns (which needs a totally different approach) or for reaching the milestone goals. Even Warren Buffet with his investing record spread over multiple decades has noticed drawdowns (temporary losses) of over 50% at multiple occasions. The portfolio is said to be in a loss, only when you redeem the same. Until such time, it’s only a drawdown ( a temporary loss).
Investing is also about behaviour
There is enough data among mutual fund schemes to share and illustrate that the ‘investment return’ of the scheme is at a higher CAGR, as compared to the investor return. Now you know who is to be blamed in this scenario. Chasing returns is not the approach and solution. And the scheme which delivered the best return performance in the previous year may not have delivered similar performance in the previous three-year or five-year performance range. Today, majority of the portfolio of the investors are in the ‘red’. But, then this is a temporary phenomenon.
If your portfolio has been constructed and built based on your risk profile and asset allocation, then volatility at any stage should not dampen your spirit. It is an opportunity to actually, allocate more into the ‘volatile’ asset class, in tranches. This is easier said than done. However, as an investor you have an advantage of data. Today, there is data on mutual performance since 1994 and stock indicies performance since 1979.
Adopt a bucket strategy
Investing time in data and taking ownership of the investing decision is the way forward. And as a strategy, adopting a ‘bucket’ method can be helpful. For short term fund requirements and cash flow needs over a 0-3 year period, the money can be allocated in short-term funds and bank fixed deposits, so that liquidity needs can be met without being in the grip of the equity market movements.
Planning for goal-based investing should be the approach for retail investors. If you have an equity portfolio constructed over 5-7 years, check the invested amount and the market value of the investments on the last date of August, September, October and November of 2018. The movement in the market value and also the recovery as noticed in the portfolio on November 2, 2018 reflects that ‘timing’ the market is an unpredictable task. Investing with a plan and process taking into account one’s risk appetite and risk tolerance should be the approach.
The writer is managing partner, BellWether Advisors LLP
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Source: Financial Express