Chapter: 3 | Born to Run – Asset Allocation

Born to Run - Asset Allocation

Chapter: 3 | Born to Run – Asset Allocation

The first two days of the ‘masterclass’ delivered by Pranav had stumped AK and Rajesh.

AK was greeted with a ‘I told you so,’ when he relayed to his wife what Pranav said about real estate investments. Rajesh was careful to not divulge the details of the discussions at home, yet!

The shortage of time for the discussions from the previous two days was bothering AK and Rajesh, both. They proposed in the WhatsApp group itself that the primary purpose of their meetings in the mornings now needs to be retirement planning, Golf can wait a bit…..at least for the next few weeks.

While Pranav tried to reason that too much of Gyan in a single day might cause information indigestion, he was clobbered with the moral responsibility of saving his buddies in their old-age!

The cleaning servant at the Golf Club cafeteria was surprised to see the troika so early in the morning that day. He was even more amused when AK instructed him to keep serving coffee at their table every 30-40 minutes.

The previous day’s discussion and the ‘I told you so’ dig back at home made AK desperate for a course correction. He was clearly in a hurry, “What do I do now?” mode.

Pranav told him to stop being in a hurry first and foremost. “In your rush to do things fast, you might end up taking wrong decisions. It is not practical that you simply replicate what I am doing right now. My current situation is only due to years of work and timely revisions to my asset allocation on the basis my short and long-term financial goals. And of course, lots of mistakes and stumbles along the way,” he said.

“Bhai don’t throw these jargons at us poor guys,” Rajesh jokingly said, “Please explain what you just said in English!”

“Don’t put all your eggs in the same basket. Strategy 101, taught to us not just by our grandmothers, but also by the best-in-class military strategists. This principle, when applied to investments and financial planning, is called asset allocation,” Pranav explained.

Just like different people in any grouping have different skills, different financial instruments have different features and benefits. “How well you utilise the talents of each of your troop-members will decide how well your troop will perform as a unit,” he said.

Equity, debt, real estate, gold, alternative investments – these are all different investment avenues having their own pros and cons. Your personal situation will determine the best combination of all or some of these, to ensure you get the best possible return.

“Let me be honest with you guys. My asset allocation was heavily tilted towards equity when I started my financial planning and initial investments. Over the years, the benchmark Sensex moved from around 5000 points when I started, to upwards of 45,000 points today. However, over the years my reliance on equity has reduced. And this is by design, keeping in mind my age and also as I kept fulfilling my requirements and really did not have the need to take higher risks with my money,” Pranav explained.

“As our retirement approached, over the past few years, I kept moving my investments from the high-risk-high-reward equity to low-risk-low-reward debt investments. This was mainly to preserve capital along with the gains till that point. You see, financial planning also involves fighting your own greed. Had I stayed in equity heavily till now, my gains would have been higher. But I can say this only with the benefit of hindsight!”

“But I remember you also bought real estate a few years back,” AK interjected, with his real estate decisions still lingering in the background. “That’s correct. But that is the only time you would remember me doing so, because I only bought one property, my home for settling down, for my comfortable retirement life,” Pranav smiled, adding that his asset allocation has changed over time and his portfolio has moved from an equity-heavy portfolio 15-years ago to a debt-heavy portfolio at present. “I do have real estate and gold too in my portfolio. The difference is that it is very limited and I am very comfortable with that small amount in my portfolio,” he added.

“One more thing. Never will any particular investment type give you the best results forever. Real estate may give you good returns for a few years but remain totally lousy for next few years. Gold may shine for some time and be lustreless for a longer time. Equity market ups-and-downs, everybody knows about. Even so-called safe investments go through their weak periods, as right now, when the interest rates are so low. So the trick is to not put all eggs in one basket, keep doing re-balancing of the portfolio as one type of investment runs out its cycle and, very importantly, do not have an emotional attachment to any one type of investment avenue. This is what is called Asset Allocation”, added Pranav. Pranav showed them a chart on his mobile phone as to how various investment avenues have performed over the years, while cautioning that this chart is only till June 2020, after which a lot of changes have taken place, especially in Equity Market returns:-

Asset allocation chart

AK, all enthused with all this knowledge, summed up, “Pranav, I really liked your that part about no emotional attachment to investments. I’ve seen my elders in the family being so attached to their gold and properties that I used to wonder whether we come second-in-line after them! And now to get back to where we started today – don’t take any decision in a hurry now. First of all, start noting down all of your requirements for the future. Once that is done, then only look at what kind of asset allocation needs to be created for you and then act accordingly”.

Pranav looked at him approvingly as all of them sipped the last few drops of their third cup of coffee of the morning and readied to march towards the first hole for the Tee-off.

Gyan Collected:

  • Don’t put all your eggs in the same basket – at any age, ever.
  • Maintaining a healthy diversification of investment avenues as per your financial goals always helps.
  • Never let either fear or greed overpower your thinking.
  • Hindsight might be the best sight but it is actually useless to be of any real benefit to you anytime.
Series Navigation<< Chapter: 2 | Sultans of Swing – How to Invest WellChapter: 4 | Winner takes it All – Why pragmatic Financial planning is your Trump card? >>

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