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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