Expert advice

Oct 14, 2011,14.44 IST

Don't get carried away by one pet asset class

By Suresh Sadagopan

I have always been fascinated by Raju, our friendly neighbourhood shopkeeper, who defies any slotting – for he changes stripes with the season.  His is a stationery cum general store, normally. But, now his shop would have morphed into a fireworks shop, during this time of the year. 

After Diwali, he will get back to being a stationery and general store and again by Christmas, he would again do his Houndini act and transform it into a Gifting cum sweets/ bakery shop. And so it keeps happening throughout the year.

There is nothing like a core competence for him, unlike Miteshbhai.  Miteshbhai  is into stationery business and he sticks to it, like a horse with blinkers. But, in this field, he is an ace. His range is wide & his stocking deep. Even if he does not have an item when a customer asks for it, he notes it down and ensures that he has it in his shop. Hence, he is well known in the entire locality for stationery and has a loyal clientele. Miteshbhai has done very well for himself,  while Raju is still a struggler.

Raju’s tactics of taking advantage of every situation finds resonance with people in various walks of life. Infact, the Rajus are generally considered to be “street smart” & Savvy. Yet, in the final analysis, the opposite is true.

This Raju-like propensity is displayed by many with their investments too.  The smart-alecs think that they can move in and out of various investment products, riding the crest of every wave and switching to the next rising wave, timing the whole thing to perfection. 

This is what is currently being played out, when it comes to Gold and property. Gold has been doing well throughout the year. It has also given excellent returns for the last 10 years. Hence, there is a buying frenzy in Gold today. The assumption is that Gold will continue to climb in times to come and will prove to be a fantastic investment. In fact this is assumed to be the case and people come to us seeking advice whether they could put all or most of their investments into Gold.

The frenzy about property is similar. There are many who have tasted success in property investments over the past five-seven years. This has given them an aura of invincibility and many see themselves as someone endowed with a midas touch. But, all boats are lifted by the high tide. It is only when the tide turns, we will know who has been swimming naked, as Warren Buffett had once colourfully remarked.

Predicting the ups and downs of one asset class is one thing. This may help in making money. But predicting that to a nicety and doing it with different asset classes over and over again, is entirely another. Different asset classes have different dynamics. One needs to see the risk attached to the investment class, liquidity, tenure, taxation and other aspects before choosing the correct mix.

Choosing  the correct mix of asset classes based on one’s goals, is of paramount importance. At different points, different asset classes will perform well.  The assets one chooses should match the time frame when the proceeds are required, the risk one is willing to assume to get the returns, liquidity etc.

Some asset classes like equities may perform well only in the long-term and one has to give it sufficient time to deliver results.  In the short-term, the volatility in equities could be gut-wrenching.  So if one has chosen equities as a part of the overall asset-allocation, short-term volatility will not cause any disruptions and heartburns. 

The next on the totem pole is diversification. No matter how well an asset class is performing, it is always a better idea to spread one’s investments among the various asset classes – for overtime, one asset class can slacken and another will take the slack. Not for nothing do we have a wisecrack like “Do not put all your eggs in one basket”.

Choosing just Fixed Deposits or Gold or Property , just because they do well now, is hence not a great idea. Choosing the product which is currently doing well and cycling among those from time to time, will again not meet the longterm objectives.

For one, in this process of choosing the current favourite, one may actually get trapped in the down cycle – like in properties ( which has long cycles ). The other is that, one will end up with the wrong set of products that do not meet one’s requirements overtime.

Jumping from one to the other product may look exciting. But sticking to a pre-meditated asset allocation strategy brings home the bacon. Miteshbhai can vouch for that. Due to his roving, free-wheeling ways, Raju ab tak nahi bana Gentleman!

The author is a Principal Financial Planner at Ladder7 Financial Advisories.

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