Changing Investment Strategy

THERE are two relevant quotes that I came across:

George Bernard Shaw once said, “Whenever I go to my tailor, he measures me up”.
John Maynard Keynes, the economist, once quipped when he was accused of inconsistency:

“When the facts change, I change my mind. What do you do, sir?”

Risk management is all about being aware of the facts and implementing a plan of action based on that fact, even if it means changing your line of thoughts many times. We need to clinically analyze all new information and arrive at ‘today’s conclusion’.

Keep emergency cash, keep long-term money in equities or real estate, in the long-term equities will give the best returns – are all very old thoughts. With the collapse of the credit markets, even a credit card company would not increase limits! So what do you do?

Think hard about the risks you face, because they may not be what you thought they were.

‘Risk is not just ‘loss of income’ it is also freezing of assets’

Whether you’re investing, borrowing, planning a sabbatical, having a child, buying a home, or making a business decision, you know you have to consider risk. But what is risk?

– You always thought that technology stocks, bio stocks, pharma stocks – which are product-based, are risky. By definition such companies will give sharp ups and downs. However, Biocon has given far greater downs – not ups! No serious investor could have made money in Biocon!

– The ‘long-run’ part of equity investment is the real risk of relying too heavily on equities. The longest period of negative returns for US equities is 16 years, according to Jeremy Siegel. In India too, investing on a one time basis in 1992 would have meant a 10-year wait for getting your capital back; you would have at least doubled your money in public provident fund.

If you hit a slump in returns at the moment you need the cash, the eventual upside of volatility won’t do you much good. Remember Buffet’s words: To be there first, you have to first be there! If your equity portfolio keeps falling for the first 10 years of your retirement, your portfolio may be insignificant to participate in the rebound. This might lead to an unfortunate situation of running out of money by the time you are 78.

The solution: long-term is all fine but if you are making losses for too long, it’s time to change your approach. Go sell and salvage the situation!

But: You shouldn’t run from risky investments just because they lost money.

For many risk managers the risk is after it has happened! In fact, the asset class which gives the worst returns (prima facie) is perhaps the best place to invest. Cash looks attractive – but runs the risk of inflation. Systematic investing in equity may look risky now, but over 5 years it MAY outperform a bond fund. However the operative word is SIP not a one time investment.

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One Response to “Changing Investment Strategy”

  1. thanks 4 da article,
    nice advice,vip may be da saving grace

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