When Sachin visited my office to discuss his investments he specifically said that he’s looking for a perfect investment portfolio. His current asset allocation was 70:30 (Equity: debt) as suggested by one mutual fund’s adviser.
But sachin was not sounding happy with it, as he wanted to invest 100% into equity reason being he doesn’t require money for next 10 years. The main reason for his discontent was his bank relationship manager suggested portfolio, which has grown with 20% more as compared to his.
So what do you expect from me, I asked? I want you to have a look at my portfolio and suggest necessary changes, he replied. But your bank relationship manager has already pointed out the changes and moreover, you also want 100% exposure to equity then why do you want me to interfere in your investment portfolio?
Because somewhere I read that one should be more into equity when goals are far and this is what I want, but want to substantiate from a financial planner, who can also tell me, looking at the current market scenario that have I lost the opportunity or is there still some juice left? Sachin added.
I can sense that this is a case of Expectation management rather than financial planning. He needs to be counseled on his imaginary perfect investment portfolio.
Recent stock market upsurge has brought back many such seasonal investors who want to take benefit of this rising scenario but are afraid of losing money too.
Such kind of investors usually make the mistake of investing heavily with wrong expectations and at the wrong time. And this category gets easily missold with unsuitable products.
I handed over Risk profiling questionnaire to sachin to answer. Looking at his responses to the questions I told him that had he approached me last year, I would have advised asset allocation of 50% growth and 50% defensive, way less than what he currently has. One who’s bothered by 20% fall in the market could not handle 100% equity portfolio.
Generally, people perceive perfect investment portfolio as the one which generates maximum returns and these are the same people who expect their portfolio to fall the least in case of a downturn, which is not possible.
What is perfect Investment portfolio?
“There is no such thing as a perfect portfolio. We’ll only know what was perfect in retrospect. There is, however, a portfolio strategy that will meet your needs. It’s conceived from your financial situation, your understanding of risk, your time horizon and your desires.” – Rick Ferri
One “so called” perfect investment portfolio can be imperfect for another. Equity market does generate good returns in long term, but it brings along volatility too. You should not get carried over by short term performance. This does not even mean that you should always play safe. It’s all about taking calculated risk keeping in mind your goals and risk tolerance.
A perfect investment portfolio should have following features into it:
- Understandable: First and foremost a perfect investment portfolio is the one which is simple to understand. If you don’t understand, how your portfolio products work then how do you know they are perfect? Excuses like, some relative sold it to me or I helped my friend to achieve his target or some stock expert was telling about this on CNBC or Manikaran suggested this in his blog may not work in your favor. This is your money; you should know where you are putting it into.
- Manageable and flexible: An Investment portfolio which is flexible and easily manageable is a perfect portfolio. Flexible enough to come out and get in any time, moving within products and asset classes should be easy. You should see your complete portfolio on a single page; it should not scattered in different products exposed to the same asset class. You should be able to tell the current value of the portfolio within minutes. Perfect Investment portfolio should give you a peaceful sleep. ( Read : Declutter your financial life)
- Reasoning: If you have a reason attached to every product you have invested into or in other words if there’s a specific goal mapped to each product then that investment portfolio is perfect for you. Along with an understanding of the working of products you need to understand what role it plays in your total portfolio.
- Diversified and properly allocated: Your portfolio should be allocated in various asset classes like equity, Debt, Gold, Real estate etc. as per your risk tolerance level and goals targeted. It should be properly diversified with in different sectors, countries, short and long term securities etc. A portfolio which is not meant to chase returns but follows a process to achieve goals is a perfect investment portfolio. (Read : how to determine proper asset allocation mix)
- Tax and cost efficient: A perfect investment portfolio is the one whose returns don’t get eaten up by taxes or unnecessary costs attached to it. In other terms, while investing in any product you should be aware of the costs attached to it and taxability of returns. Insurance endowment plans do provide tax free returns but at the cost of returns and this is due to heavy inbuilt undisclosed expenses and investment structure. Same way real estate has different costs attached to it and also the returns are taxable. Having too much of real estate and investment linked insurance products are not good for your investment portfolio
Perfect Investment Portfolio – Conclusion:
Searching for a perfect investment portfolio based on returns leads to disappointment only. “Perfect” or “All weather portfolios” are not real. No one can predict future. Performance of different asset classes depends on many economic and political factors which is not possible for anyone to foresee. Even your financial planner would not be able to help you in that. His job is to design a proper process and strategy for your finances to put you into a discipline.
Investing strictly on the basis of recent or past performance may result into a terrible portfolio which is not good for your financial health.
The real perfect investment portfolio should help to plug in the behavior gaps that come into play in different market scenarios. It should be the result of a properly laid down process makes you stick to your investment plan without completely abandoning your strategy at worst possible times.
What are your views on perfect investment portfolios? Do share.
Manikaran Singal is the founder and Chief financial planner at Good Moneying Financial Solutions. He is a CERTIFIED FINANCIAL PLANNER CM and SEBI registered Investment adviser (Regd no. INA 100001620). He’s having 20+ years of experience in financial services space.
Hi
Am regular reader of your blog and I reallyReally nice article on perfect investment portfolio that everyone should know about.
Can you tell me abt my portfolio, of course I know as you rightly said every FP role is to design the process flow he needs to follow and stick to it. Even then I just need you to look into it at ground level. I appreciate you for giving my reply’s to earliers comments and questions as well
Am current age is 39. I do have a portfolio consisting of Equity MF around 60-70% and debt (purely bank deposits) 30%) . I have build my portfolio entirely based on my financial goals in the long term more than 10 yrs from now like educating the kids and their marriage and my retirement goal. I belive that equity is the only asset class which can give superior returns in the long term than other assets class like RE, Gold, Fixed Income etc. I have allocated pure large caps for my kids education and marriage which are non negotialbe goals and multi caps for my retirement. Is my allocation of funds and portfolio makes sense for my long term financial goals?
In my opinion if one does an sip and sticks to it without looking the market sentiments in an average performing MF which gives 12% annual or CAGR returns can make wonder superior compounding returns in the long run.
Please comment
Thanks for reading and liking my article.
You are on right track satish. Just be sure that you are saving enough to achieve your goals. Though its good to sticking to a fund but you also have to keep on reviewing the things time and again, to make the necessary changes if required. Keep rebalancing your asset allocation.
Thank you very much for your earlier reply.
I have one question regarding the investment. I hope you will answer this question too:
For the current F.Y I need to pay income tax of Rs.9000. I have an ELSS(made lump sum payment of Rs 38K) with Canara Robeco Tax Saver Fund which was invested in 2010 got matured last year with maturity amt of 75k as on 11/25/2014 NAV. My qustion to you are.
1) Can I reinvest this proceeds of 75k in the same fund under direct plan, so that
I can save tax of Rs7500. But it will get locked for next 3 yrs, pls note I dont have any near time commitments as I have created some emergency funds through Bank FD
OR
2) )Am also investing in other equity diversifed mf(for my long term defined financial goals) through SIP since long time they are FT India Bluechip, DSPBR Top100, L&T Eq, QTLE, ICICI dynamic fund, IDFC Pre Eq. Can I redeem the proceeds from Can rob tax saver fund of 75K and apportion equally among the other 6 funds, so that as per FP rule one cannot have more than 5 to 6 funds in the portfolio, but need to pay income tax if I do so if I opt for this option, as I dont have any other investment option Under 80C other then ELSS.
Please note that I dont want to add or switch to any more new funds than the above funds, cos all the funds I have choosed have a long term track record which can create a good corpus in the long run say more than 10 yrs for my goals.
What will be your opinion on the above, which one I need to choose?
Awaiting your reply
Thanks
Satish when the purpose is tax saving, that that is available through Equity option by investing in ELSS then there’s no point withdrawing money, pay taxes and invest in open ended funds.
You can switch the fund to direct code on maturity of scheme.