“The most important key to successful investing can be summed up in just two words – asset allocation.”
~ Michael LeBoeuf
Rita knew that she mustn’t put all her eggs in one basket. But, when it came to managing her finances, she preferred to be safe than sorry. Rita’s investments were concentrated in bank deposits and she was keen to maintain the status quo. As time progressed Rita was pushed to widen her investment options. So, what made Rita change her mind?
Rita was confident and comfortable with bank deposits. When her career growth took her to the next tax bracket, she compensated for lower returns with more aggressive savings. Rita was sure that discipline was the key to becoming wealthy. Her confidence shook a little when her fixed deposits offered her a 7.5% return compared to the 8.5% from a few years back. And with no warning at all, the interest rate on her deposits breached the 7% mark she had mentally prepared herself for.
Rita was forced to rethink her savings plan. She wasn’t comfortable moving away from debt instruments. As her deposits matured, she moved monies into corporate bonds. While they offered better returns than the deposits, they offered little liquidity. As a retail investor, she was forced to hold them until they matured. She learnt that the more a bond paid, the more risk it had associated with it. There was a reward to be earned by lending for a longer time or to someone less creditworthy. Rita didn’t want to venture downwards in the quality ladder, but she didn’t mind lengthening her investment horizon.
Rita’s investments in bonds did quite well as interest rates moved further down. Her bonds were more valuable than new ones in the market. And like many other debt investors, Rita didn’t know where to put her fresh savings. Deposits and bonds had lost their appeal.
Rita turned to her parents for advice. Her mother’s life savings were in gold. But now there was a lot of jewellery that she wasn’t willing to part with. She had to constantly check her lockers and the jewellery had little functional value. Gold prices had gone up significantly over the years – so Rita’s mother was confident that gold was a good investment avenue for her daughter.
Rita wanted to be free of worry – she didn’t have the time or inclination to worry about lockers, the quality of gold, and she certainly didn’t want to lose money to making charges and wastage. So, she discovered gold funds, ETFs, and sovereign gold bonds.
Surprisingly, her gold investments went nowhere in three years. Meanwhile, the equity markets had soared. Rita’s neighbor had a made a killing in the stock market.
Rita curiously waited and watched what happened in the equity markets. For a while, it looked like up was the only direction it could go. To Rita, this seemed like great news – there was practically nothing to lose. However, her neighbor, Atul seemed concerned with the way markets were behaving. As the markets climbed, Atul pulled more money out of the markets and chose to stay invested in cash. The markets continued to soar and Rita wondered if Atul had made the right choice.
When the markets corrected it was swift and unexpected. Rita was thankful that she hadn’t invested in equity instruments. She didn’t think she could stomach the rollercoaster ride. Atul felt otherwise. He felt that the stock market had a place for every kind of investor. He could even envision the kind of portfolio Rita would be comfortable with. So, he nudged her to invest in Mutual Funds.
Rita discovered that mutual funds relieved her of the headache of picking stocks and switching them out. She was overwhelmed by the sheer volume of choice. Rita knew she was out of depth and wasn’t inclined to invest time in understanding markets or doing equity research. So, she sought a financial advisor who could help her navigate these waters. She appreciated the benefits of investing in mutual funds. As a first-time investor, she was able to test the waters with a small investment. She could even invest in mutual funds through a Systematic Investment Plan (SIP) which was just like a recurring deposit.
Role of Financial Assets
Rita’s financial advisor opened new doors for her wealth. A year into their association, Rita clearly understood the role of each of her investments. Her deposits and debt instruments were meant to preserve her hard-earned savings and generate a steady return. Gold wasn’t an all-weather investment. She had to carefully select when to enter and exit. She always had some cash set aside. This created financial flexibility – allowing her to handle unexpected expenses with ease. Her equity mutual fund investments were for the distant future. It no longer mattered if her fixed deposit returns dropped, or if she had to pay more tax. Rita’s money was now working harder than she was!