Monday, October 19, 2020

Investing though a bumpy ride: Having a stable support

 

Investing though a bumpy ride: Having a stable support

My article with similar thoughts was published today in the Morningstar

During my school days, two of my friends and I would go often on public buses to explore the city. Those who have travelled in Chennai’s public buses during traffic hours know about the bumps, sharp turns, sudden brakes which would shove us front, throw us back, and get us swaying. To avoid getting hurt, I would always hold on to the holders or to the front seat when seated. One friend would sit confidently and use little support only when required - when the bus was braking and making sharp turns. He was not affected much by sharp movements and seemed to enjoy turbulent rides. The third guy wouldn’t want to take any chances and would always use both hands and tightly hold on to the holders or seat in front if he were seated. He was clear – bus drivers are not to be trusted and he wanted a firm support, just in case.

Three different folk – affected differently, responding differently.

As I think about it, our investing journeys, just like bus journeys are a bumpy ride, what with huge volatility and in addition, uncertainty of reaching our destination (financial goals). And each of us taking the journey has a different temperament – like the three of us travellers in the bus.

Some of us can take all the volatility and not bother – because we may have the capacity to take such risk, having a mental makeup that zooms out and sees things objectively OR having secure jobs, financial stability already etc. The volatility in the markets may shake some of us – but not so much that we are shattered and get badly hurt. For the rest – may I say the majority, going through a huge drawdown can be a shattering experience mentally. Even financially, a majority of the investors are not prepared to recover from a 50% drawdown in equities.

You’ve guessed it right: The point I am coming to is what I keep making on twitter - the importance asset allocation. Refer to the bus example. We used a support, an anchor to keep us in place and safe when there were sharp movements. So also, investors, in their investing journey need a stable anchor to hold on to.

This is why I often speak about the need for Liquidity and Stability in the form of Liquid Funds, FDs, Bond Funds as the stable anchors to see us through volatile times. Add gold to this also. When markets are volatile and there has been a drawdown - at that time to make a rush to safety and liquidity would be terrible. You would be selling a loss. What if you already had an allocation to your stability anchors. You would then have a relatively calm mind and be able to think objectively.

Wanting to keep this message short – I will end by saying – Know your mental make up and your financial capacity – BOTH. Then, accordingly decide your need for stable anchors in your investment basket. In the financial journey there is more uncertainty than in a bus journey, so the need to be more careful.

Mutual Fund investments are subject to market risk. Read all scheme related documents carefully before investing

(I am a mutual fund distributor. Connect with me on twitter)

 

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