‘The biggest risk in a portfolio is the portfolio creator’s inability to understand risk’

I have no clue whether Mark Twain, Warren Buffet, Peter Lynch, Taleb, or anybody else has made this statement…if they have not, here is a original statement from Subramoney. As originals are very rare, please remember you read it here first.

One risk that all of us HAVE to understand is the risk of inflation. So for all those experts who think a portfolio containing public provident fund, national savings certificates, bank deposits are ‘No Risk Portfolio’ please think again.

The youngsters whom I meet have got the following advise….

1. Over the next 3 years nothing good will happen in this country so keep your money in debt.

Vow…why should a 24 year old worry about ‘3 years from now’? Beats me. Ok let me stick out my neck. Over the next 3 years (starting Nov 2011) Hdfc Top 200 would have out performed the best FD that is available today (let us say SBI FD – not some risky debentures).

2. You will not incur a loss if you are in a debt portfolio. Correct.

You will NOT RETIRE either. My dad’s dividend income today is HALF the amount that he got as PF for his 37 years of service. If he had not invested his money in equities, he would not have the lifestyle that he enjoys today WITH HIS OWN MONEY staying in his own house.

A kid of 24 today runs the biggest risk of inflation and will not be able to RETIRE AT ALL (leave alone at 60) if he has a portfolio sans equity.

3. Invest in Real Estate – God does not make it any more.

Look at the 30 year figures, put it in excel and then take decisions. Maths and logic should prevail – not parental pressure – just heard of a 25 year old committing to buying a house because she was emotionally blackmailed by her mom to commit to a house.

Mom’s Logic: It is her house – at least it is forcing her to save by paying the EMI…

Like the depression babies of the US, India has the ‘Harshad Mehta’ and ‘Ketan parekh’ babies. These people keep talking of ‘My father lost his 3 lakhs in the market…or some such stories. Take a closer look – it is YOU who is to be blamed.Not the market, not Harshad Mehta, not Ketan Parekh, not SEBI…JUST YOUR LACK OF KNOWLEDGE..of course risk also comes for people who think websites and blogs can replace good advisers. For such people risk comes from reading too 🙂 – because understanding is not a given, is it?



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  1. Not sure whether anyone made the above statement on risk. But am reading the statement for the first time, although it is fact – “India has the ‘Harshad Mehta’ and ‘Ketan parekh’ babies” LOL.

  2. Risk comes from not knowing what you are doing…whether you are investing in bonds or stocks. And of course, as you said, the biggest risk is ‘YOU’ – the investor himself.

    One doesn’t need to be a genius to become a successful investor. One only needs to have self-awareness and awareness about his investments, and then invest accordingly.

  3. Need your suggestion.

    I have 10 lakhs and I do not need this money for next 3 years. Please forget my age and for next three years I am ready to take risk in equities. Say if I want to get good returns on this 10 lakhs investment, in which product/stock/mutual-fund should I invest so that I can get better returns compared to the best available government bank’s fixed deposit interest rates?

    Kindly request you to clarify.

  4. Keerthi

    Reading your question replacing 3 by 7, i would suggest you do a sip (over 3-4 months) into Hdfc Equity fund, Icici Pru Discovery fund, Franklin India Flexicap fund.

    However if you are stuck on 3 years i would do the investment as a lumpsum in Hdfc MIP (Long term)…but also withdraw at the end of 30 months in 6 instalments…

    personally I am against more than 30% equity exposure if it is for 3 years

  5. Thank you Subra Sir for the prompt response.

    I am interested in 3 years time frame and I would be *strongly* considering your suggestions however one more question.

    Do you think investing in Gold(bards/coins) for next 3 years would give me better returns compared to Best-Government-Bank-Fixed-Deposit Or HDFC-MIP-Long-term-Growth ?

  6. I feel it is again “survival bias” here. Subra sir has good understanding of equity so he is advising to invest in equity.
    However, the context is missing. Everybody knows that equity has given best returns for last 10 years and not-so-good returns for last 4 years. Equity has run up too much.

    I remember that a person told on CNBC Awaaz that invest in equity because India’s GDP is growing 14-15% on nominal terms. He didn’t tell that what matters in equity market is profit of the company and not revenue. What use of delivering order of 1000 Cr. for profit of 100 Cr. and then paying 90 Cr. in interest payments to bank. The company’s topline would be great but bottom line not so great.

    So for long term, invest in equity. But know for sure that you have great debt offering around right now to lock in for long term.

    Also, demographic effect will show up in next 30 years. It will be the time when majority of equity investor would have retired and withdrawing money from equity market. This is what exactly happening in US right now.

    Also, in US equity is avaliable at 15 PE where government bonds at 3% yield or less. In india, equity is available for 19 PE and government bond at 8% or more. Which would you go for?

    The only case where indian equity will give good returns is if RBI/government prints money like anything. However, RBI seems to be prudent to not to do so.

  7. Sanjay, based on your data, US equities definitely seem a better bet than Indian equities. But then, following a bottom-up approach to stock selection is very important. Sensex is anyways made up of the most expensive stocks in India, so treating that as a benchmark for your decision to buy/not buy stocks isn’t right. Most of the wonderful long-term stories in the Indian context lie outside the Sensex…and if you have a 10-20 year horizon, this is a perfect universe you can scout for some amazing companies that have some pricing power, generate a lot of free cash flows, and reward investor with dividends.

    As for debt, I don’t think it is a good long term investment given that inflation continues to run above the yields. So the inflation-adjusted returns from debt isn’t going to be greater as compared to the type of stocks I mentioned above.

    Of course, as I said, proper awareness about yourself – your emotional intelligence and risk-taking capabilities – is of utmost importance here.

  8. Hi Subra,

    Why did HDFC Top 200 come to the top of your mind while writing this post. I fail to understand why HDFC Top 200 has become a huge hit with all advisors and financial bloggers despite the huge beating it has got in the past few months.

    I personally did not go behind that fund and stuck to UTI Div Yield and UTI Oppurtunites instead because I am seeing HDFC Top 200 a clear case of the “herd mentality”. Am I thinking incorrectly? Of course long term views will be positive but isnt it a fact that the more you lose, the more time it will take to recover?

    But I am surprised to find it being mentioned here too. Would love to hear your rational for the fund.

  9. for the past 10-14 years MY portfolio has had Franklin India Bluechip, Hdfc top 200, Hdfc equity, Hdfc Prudence, Franklin India flexicap, Franklin Prima, Icici Pru discovery and I Pru dynamic.

    No Uti. Happy with the results – and therefore the process.

    ‘Herd mentality’ which works is better than valor. Picking a fund is after picking a fund house. And the process is long. I will stick to my portfolio till these schemes under-perform the INDEX not other fund managers. One sallow does not make a summer

  10. Agree with you subra. But as a first time investor I first went and did some study, instead of taking opinions from tabloids or advisors, took my time to compare and contrast the various parameters of MF’s and found that as per the 5 year trends, sharpe ratio etc. UTI fared better than HDFC in large and mid cap space. My other picks were Franklin India bluechip, idfc premier equity.

    I am not trying to be brave, just trying to see that I make no mistakes with biasing other’s opinions and also learn in the process.

    So did I make a good choice, or should I have relied on what people adviced viz. HDFC Top 200, HDFC Equity, etc?

  11. Dear Subra,
    I am 26 and married. I have Rs.7000 to save every month. I have no savings(except LIC-50000-Jeevan Anand- not a saving though). RD or SIP? what is your advice?. I “may need” half of my savings every year.(Thanks for your articles. I learned a lot from them).

  12. Hi Sivagnanam ,
    according your need, invest 3k in DSPBR top 100, 1k in Reliance equity Oppty & remaining 3k in IDBI liquid fund.
    Remember that you can take out money from IDBI scheme but the other two I mentioned above.

    @ Subra sir – Request your views on above advise.


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