We have never said this before. We will probably say it again. But here it is for the first time, “You need a financial advisor”.
Anybody who is gainfully employed, has a family, a bunch of friends and a host of hobbies probably has very little time to manage their investment portfolio. If you are one of them, then you need a financial advisor. Not the kind who will offer advice to you for free in exchange for a kickback from the mutual fund houses whose schemes they are trying to sell in the first place. But the kind that will take a fee from you in exchange for unbiased, goals and risk-based wealth management advice which takes into account your own specific set of circumstances, risk tolerance, and outlook in life. Sort of like a trusted family doctor, except that the investment advisor will manage the health of your finances and will know pretty much every financial ailment that you have.
But picking the right advisor is one of the hardest challenges of life. In some sense, it is probably harder than choosing a doctor. While most people will hold sacrosanct a medical prescription written by a doctor, investment advice offered by financial advisors is sometimes looked at with scepticism. And perhaps rightly so, because human biology is a science and there are usually definitive answers to most questions. On the other hand, making financial investments is just as much an art as it is science. Consequently, the correct prescription for your financial circumstances is only known ex-post facto (after the event). So how then do we ascertain the quality of advice provided by an investment advisor?
By saying these magical words to the advisor – “Thank you for your advice, now show me where your money is invested”.
Given that we have been giving out an awful lot of investment gyan over the last 13 weeks, it is only fair that we show you where our money is invested. Hopefully, it will prove that we take our advice to you quite seriously. But also give you a mental framework when you start thinking about your investments.
Showing you where our money is invested
Disclaimer: This is not a solicitation to invest, it is merely an educational column.
Asset Class View
Let’s start with the asset classes perspective. Historic data has convinced us that equity investments are by far the biggest wealth creators in the long run. But it is also subject to the vagaries of Mr.Market and its ups and downs – which we, much like the rest of you, don’t like. Our asset allocation hence takes this into account in addition to our risk tolerance, capital needs and factors in a valuation tilt (more expensive the stock valuations, lesser our allocation to equities and vice versa. More on this later).
We don’t own a house. We like it that way. It helps us make big plans – like doing a road trip across the world someday or moving to the French Riviera sometime. We are debt-free and hold one credit card which is past its expiry date. This helps us sleep well at night. We make no claims that this is an ideal decision. People have made a killing in real estate. Leveraged investments have made some people very, very rich. But the question boils down to, “What is your outlook in life?”. That will decide your comfort level with leverage.
This is an area little explored by most people. An overwhelming portion of people’s wealth is in the currency of their home country or that of the country they are employed in. But almost everyone has needs, dreams and ambitions that go well beyond the little bubble they live in. To go on that dream trip to Switzerland or to get an MBA from a B-School in North America. So why then restrict your portfolio to a single currency?
This is roughly how our investments are denominated across various currencies.
No big insights here. Currency diversification is often a consequence of asset allocation. But it is important to keep a view on it to ensure that our risks, both short term and long term, are shielded from currency market movements.
Equity Assets - Geographic View
Following a similar line of thought from above, we are strong proponents of international diversification. We get excited about investing in good businesses that are changing the world. More often than not, we don’t find them all in a single country. The world’s most valuable semiconductor company is in Taiwan, the world’s biggest Li-ion battery manufacturer is in Korea, the fastest growing e-bike manufacturer is in China, the biggest technology firms are in the US and India’s biggest taxi aggregator (Ola) is owned by a company (Softbank) which is listed in Japan. So why restrict our investments to a single country?
This is roughly how our equity investments are spread across geographies. Some of these businesses are present across the world. The classification shown here is based on where they are domiciled.
Stocks - Direct Investing vs. ETFs
The world is a bit divided in the debate on low cost passive investing vs. active investing. The jury is out there. But we do a combination of both when making equity investments. This is how our equity investments are split between direct stock investments and ETFs.
Bond Funds – Mix
Not a lot of commentary here, our bond allocation is fairly straight forward. We are half and half on gilt funds and credit risk funds and primarily invested in India. The gilt funds we are invested in are long dated while the credit risk funds are shorter duration. This is purely because we expect the interest rates to go down further from here in 2021 and there is money to be made there. Our view will rapidly change on this though as we go into next year.
Our gold investments are primarily in the form of ETFs and our fixed deposits are, well, fixed deposits. We hold 15% in cash and low-yield investments so that when an opportunity opens up, we are ready to pump cash in. This also serves as our emergency reserve in case we need it.
What improvements are we making?
But as we go into 2021, we are making changes and your investment portfolio will also need re-evaluation and re-alignment as market conditions change and risk/return expectations change. The changes we are doing to our portfolio are
- Re-aligning our equity portfolio to further chase some of the biggest themes of our time like emerging markets, EV production, ESG etc.
- Creating exposure to commodities, especially those that have industrial applications like Silver, Nickel, Cobalt, Lithium, Copper etc.
- Tactical asset allocation on currencies given today’s outlook of a depreciating USD, appreciating RMB a rather indecisive GBP on the back of Brexit.
And that’s it. I hope this gives you a framework to think about your investments and your portfolio as well. If you have any questions, drop us a line and we will be happy to have a chat.