Human beings tend to believe in the herd mentality. If red is the colour of the season, you will see all the beautiful people around you dressed in red. Likewise, if a few people in your locality come back from a tour of Kashmir, everybody and her uncle will be seen flocking to, or at least planning to flock to, Kashmir.
To cut it short, human beings draw a lot of comfort following the crowd.
However, there are some areas your needs and aspirations are unique -- for example, your medication and exercise regimen. Similarly, your investment portfolio (read financial plan) should also be unique to you.
Like a doctor prescribes your medication for your individual needs, your investment portfolio too has to be designed keeping your needs and goals in mind.
We all save money because we have certain responsibilities and dreams in life that are unique to us. Unfortunately, most of the times, those responsibilities and dreams are not clearly defined. As a result, we end up linking our investments to stock market movements (as if there is no other investment avenue. Historically, though, it has been the best yet).
However, you continue to buy stocks or invest in a particular mutual fund just because your friends, relatives or their uncles and aunts are doing the same for their financial well being.
Usually, whenever equity markets move up continuously for sometime, there is a sudden rise in queries related to inesting in equity. As a wealth manager, I've noticed that most of the individuals who write in want to know 'hot' stocks whose value will double in six months or the latest 'IPOs' that can give them 30-40 percent returns on the day they list on the stock market.
Similarly, since January-February this year, the interest rate on bank FDs has had some upward movement. Therefore, more and more individuals want to know whether it is good time to park their funds in bank FDs.
However, the most important question is: Should you base your investment decisions on such short-term trends?
Remember, the way your medication needs are unique to you, your portfolio needs are also unique to you. So it makes sense to build a portfolio that will cater to your needs. If you are saving for financial goals that are more than, say seven to nine years away, invest in equity. Similarly, your funds for retirement, which could perhaps be decades away, should always be in equity.
Usually, on such long-term basis, a well-diversified equity portfolio has very little chance of losing money. Equity is risky (volatile) in shorter period, say two to three years. As the time horizon increases, your portfolio will become less risky (volatile).
On the other hand, if you need money after a short period, say two to three years, to purchase a house -- or, for that matter, any financial goal -- park your funds in debt based instruments.
While your debt instruments may lose to inflation (Real rate of return = Rate of interest earned on debt investments less inflation), your principal will remain intact. If you are saving for an interim period, invest in a combination of debt and equity.
Choosing debt for the short term and equity for the long term should be an ideal strategy, irrespective of whether the Sensex is at 3,000 or 13,000. This kind of thinking and strategy will protect you from following the 'herd mentality' and, ultimately, from financial losses as well.
Remember, the situation in the market place is always dynamic. Interest rates, property prices and stock markets will have their ups and downs. They all move in cycles. If you start linking your portfolio to market conditions, your financial life will also become a cycle, which will keep going up and down.
As a sane investor and a responsible family person, you would never want that to happen.
Another fallacy is that we 'copy' our colleagues/ friends and neighbors when it comes to investing in financial products like shares, mutual funds, insurance policies, etc.
Recently while speaking at a seminar, a member of the audience shared this interesting anecdote.
She talked about her friend who used to invest all her money in the schemes her boss would invest in. She worked as a secretary of her company's CEO and, by that virtue, was privy to her boss' investments (Her boss would make her fill all the mutual fund forms!).
One day, she casually told her boss how she has invested in the same schemes as him. During the discussion, she realised her boss was investing in schemes that were meant to take care of his daughter's higher education.
Interestingly, the secretary was not even married as then.
Nevertheless, this is what you should keep in mind when making an investing decision: If you are investing for your retirement then equity is your best bet for the reasons mentioned above; for investing for your kids' education, you can put your money in a mix of debt and equity.
Gaurav Mashruwala is a certified financial planner. He can be reached at gmashruwala@gmail.com.
