Is Balance the Answer to All Our Investment Related Questions?

Every aspect of life requires a balance. We talk about work life balance, about having a balanced diet, instruct our kids to have a balance between academics and play time, balancing the demands of individuals in a relationship etc. Even specific micro activities require balance – between driving speed and time spent to reach a destination while driving, between aggression and defense in sport. The Government has to balance its budget between how much it spends on social causes and investments, humanity needs a balance between growth and sustainability, households need to balance between their expenditures and savings.

Diversification and Asset Allocation is the equivalent of Balance when it comes to investments.

As an investor, it is critical for us find the balance that works for us. It is the holy grail for any investor. The balance that we find for ourselves will determine the asset allocation (allocating our investments across various asset classes), the geographical distribution (how much in Indian assets and how much in other countries – for e.g. buying shares of Apple / Amazon), the different strategies and fund managers that we will deploy our money with etc.

Ergo, knowing the balance will lead us to determine our investment strategy and make the right choices when it comes to investing our hard-earned money. This balance itself is a function of various factors and will obviously be different for different individuals. Some of the factors can be listed here –

• Where we are in our financial lifecycle – determines how much wealth we have, our investible surplus, goals we are investing for, our liabilities and commitments, time horizons of our various investments etc
• Our attitude towards risk – how much risk (chances of the investments running into loss) can we afford to take? Are we ok to lose 30-40% of the principal in case the markets witness a sharp fall or the borrower defaults? Are we ok that the money invested may not be available to us for the next 8-10 years or we may not be able to sell it anytime we want to?
• How much returns will we need on our investments so that we reach our goals – higher the required returns, higher the risk we should be willing to take.

Knowing the balance that works for us is just the start of our investment journey. The destination is usually far, and this journey could feel like being on a smooth highway, a pothole filled lane or a roller coaster depending on our choices and our reactions to every twist and turn that we face.

This brings us to the second key element in our investment journey and the good news is this is entirely under our control – our emotions. How we react to various developments in the markets and their impact on our investments can go a long way in determining whether we are able to achieve our goals. In most cases it pays to stick to the plan and not get excited (greedy) or petrified (fear) by short term developments. Reaction to short term factors can divert our attention from the road ahead and often leads to de-railing our plans. This does not mean that we should not review our investments or ever re-visit our hypothesis. What is critical is to not buy into the latest fad or the media hype and not get too worried about any policy action or news item, unless they have a material long term impact on our investment portfolio. Here again, you guessed it right, we need to maintain a balance.

How much we invest, where we invest, how early in our life we start investing will have a more lasting impact on our portfolio value than being able to predict / guess the next government action / quarterly earnings / weather patterns / central bank action / ….

They say, “there is many a slip between the cup and the lip” and this is true for our investments also. Knowing what is required to be done is very different from doing that. Like in many aspects of life, having someone to help and guide us and hold us accountable to the process that we set out can be critical. This guide would help us understand ourselves as an investor, make the right choices through the investment journey and nudge us to maintain the right speed and stay in the right lane.

Once we have the balance right, the markets and the power compounding start working their magic and help us move closer to our destination.

The views are personal and are not part of the Outlook Money editorial Feature

By Umesh Rajgarhia, Founder, Adding Well