<% fnAddCommonMetas %> <% sConnRespMenu="3opt" %> <% sShowFBTrack="No" %> <% GTM_fnGoogleTagManagerHead %> <% fnAddGoogleAdHead %> Are you a humming bird or an albatross? - Asset Allocation Guide by Equitymaster <% sMenu="no-menu" %> <% GTM_fnGoogleTagManagerBody %>
<% sShow728Ad="N" sShowHText="N" sShowLogo = "" sPageSelectedMenu = "Outlook" %>
<% Dim sBCData() ReDim sBCData(3) sBCData(0) = "Home" sBCData(1) = "Outlook Arena" sBCData(2) = "Asset Allocation" sBCData(3) = "Are you a humming bird or an albatross?" fnBreadCrumbResp sBCData %>

Are you a humming bird or an albatross?

<% fnAddSharingIconsHori "Y", "Y", "Y", "Y" %>

Ajit Dayal on why long term investment decision making is important.

The recent run-up in the Indian equity markets caught many unawares.

Graph 1: Flying away - or ready to hit land again?

Source: Ace equity

That is the danger of near-term forecasting of the Index (ahem, please do not take my "predictions" of Index levels as an admission that I, too, am a "forecaster"! ☺).

Forecasting @4,000 flaps a minute - or @100 mile glide?

By definition a near-term forecaster needs to focus on the near term.

And while Keynes oft-quoted "in the long run we are all dead" is true, in the short term we are all blind and clueless.

Keynes forgot to note that, while we are all dead in the long term, we would live with different levels of health and wealth along the way. You can die with a happy life behind you. Or you may die with an unhappy life behind you. The journey can be fun, miserable, or somewhere in between.

Near-term forecasters have to live with various global and local factors that can change rapidly; have tremendous impact on our lives today; or are mere acts of insignificance when viewed over the long run. They need to absorb, digest, spit out, react to millions of bits of information and treat each "input" with the same seriousness as if their life depended on it. Well, in some ways it does. If there is no "forecast", their clients will not trade, and if there is no trade, there is no revenue. And if there is no revenue, there goes the Big Fat Bonus, and if there is no BFB, there goes the high-intensity, high-cost lifestyle. Like hummingbirds who flap their wings 4,000 times a minute, the near term forecaster feels compelled to churn our forecasts - yet, create no movement.

Long-term forecasters have life a little more easy - with probably less blood pressure. They have these laid-back long term views that they don't need to flap around too often. Like an albatross, with an ability to glide for hundreds of miles, the long term forecaster goes with a strong underlying flow. Sometimes the wind currents take a dip and cause the albatross to shed a few hundred feet of altitude. Sometimes the wind currents take them on a higher flight path. Not that the albatross is on auto pilot and drifting aimlessly, shut off from the world. It does track and note where the ships are sailing, where land is, and - by watching its path - ancient mariners reached the safety of shores.

Investing or punting?

Given the two extremes of the rate of flapping of wings, the question to be asked is: what are you? A humming bird or an albatross? And what would you feel more comfortable doing? Flapping aimlessly with a high heart beat or gliding with some direction - both towards a promised nirvana.

I ask this question to deflect the blame being thrown around by those who "redeemed" their investments in equity mutual funds in the May-July period when the stock markets were decidedly dull. The common "complaints" are:

  1. I had invested in your fund for three years and nothing happened - so I got fed up and left;
  2. But no one told me the market would surge;
  3. The interest rates in FD's were more tempting;
  4. I was told to invest in property because that is now recovering.

The key to any investment decision is not necessarily what is happening in that particular asset class on any given day, week, month, quarter, or year - but what is your long term objective. Punters - like the humming bird - flap away aimlessly trying to find the next big asset price surge to live off. But flapping may get them nowhere.

The boring investors, like the dull looking albatross, have some long term view of where they wish to be; they sit down and plan, and make their judicious decisions with some mid-course steering. They can glide the declining trends in share prices, in gold prices, or property prices much the same way that they can enjoy the surge in the prices of these asset classes. Changes in the prices of these various assets may cause them to tweak their allocations to ensure they reduce the risk (and increase the probability) of achieving their long term goals.

A sensible asset allocation based on a "need" and "willingness to risk" matrix is a crucial first step.

The decision of which equity mutual fund, or Bank FD, or property to buy is a second-step. First you need to work out how much of your savings do you wish to risk in every asset class. And that number does not need to change for years - or it may change with a "life event" which arises to a sudden need for money due to a changed circumstance.

After you have the broad allocation right, then you figure out the "best of breed" or best investment opportunity in each asset class.

For those who feel the flapping of wings has resulted in a "missing" out the recent rally - or if you feel the need to see where the ships are as you glide along like an albatross - talk to a financial planner or click on www.PersonalFn.com (a business that I helped set up and am still a significant shareholder in).

The point is not to rush into stock markets because of the recent rally - stocks can decline rapidly again, just like that wind current can cause the albatross to drop a few hundred feet in altitude. But you need to ensure you are clear on where you are headed and whether you are on the correct path.

Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is a Director at Quantum Advisors Pvt. Ltd and Quantum Asset Management Company Pvt. Ltd. The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The author, Equitymaster, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same. Please read the detailed Terms of Use of the web site. To write to Ajit, please click here.

» Next: Investing in FD's is a losing long term proposition

Homepage: Planning Your Asset Allocation

How has Charlie Munber influenced your stock picking style? Tell us!

<% fnRBRightBandDefault "warren-buffett-value-investing.asp","warren-buffett","N","Y" %>
<% FC_fnAddChartsJS %> <% fnAddJSInFooterGTMOpt "1","" %> <% fnAddThisJSOnly %> <% fnWebsiteFooterNewGTM "","Y" %>