Flitting like a butterfly is interesting

Think about this… let us take the case of a developer who wants to build a residential block and has got all permissions for it and has even started the work on the ground. Now,  he finds that offices are fetching more returns and hence wants to scrap the previous work and reconfigure the development into an office complex. Now after another year, he finds that a hotel could have been even more lucrative and he wants to convert it into a hotel. Does this not sound ridiculous? Which sane developer will keep changing the plan midway? It involves huge costs, efforts and wasted time.

That this is stupid is very evident to us. However, we keep doing the very same thing in our personal lives and think we are smart. We have goals and we have devised a strategy to reach the goal, after much thought. We have invested in specific instruments so that the goals may be met, in the intended timeframes. But, all these go out of the window when there is a rally in a particular asset class. We notice the frenzy and we also want to participate in it. Gold and property are such assets now – people are exiting equity based assets and investing into these. In some cases, they are exiting from everywhere completely and putting their money into property and gold.

One of the big problems in property is liquidity as well as tax implications. There are also loans which most go in for, when they invest in property. Hence to create a property, it is not just diversion of existing savings alone, but loans too. Also, there would be costs of exiting. Now, this completely changes not only the asset allocation mix, but also increases the risk in terms of adding liability to one’s portfolio. Since the liability is for the long-term, it has implications for years to come.

This is tantamount to scrapping a residential project midway and converting it into a mall! The main thing to understand is that every asset class has certain characteristics and dynamics. Every asset class will perform at certain points and may not at others. But, when one has put together a portfolio using a bouquet of products, one would have ideally considered all aspects like risk-return expectations, variability of returns, liquidity, taxation & tenure. Changing the assets radically, completely upsets the liquidity, taxation, tenure and other aspects, which one had taken into account in the beginning.

A tactical allocation change can be done. But that allocation change can be to the extent of upto 10% of the portfolio.

Investors need to understand that chasing fads do not yield results. If they already have a plan and have invested as per that, it is best to stick with it, save for some tactical adjustments. Every asset class has it’s cycles. Properties have been on an upcycle for the past 7-8 years. It has probably run it’s course. Equity has had a down cycle for most of the last 5 years. The cycles in both cases will turn the other way, overtime. The point to note is that no one can predict when that may happen. That is precisely the reason why one has to stay invested for the longer tenure, provided the fundamentals of the asset class had been validated at the time of investments. 

If we need water from the ground, we need to dig a deep enough well in one place. After digging 20 feet, we cannot decide to go to another place, as in the other place water was found at 15 feet. It is better to persist in the existing place so long as the place holds potential for water ( as found from appropriate survey or from a water diviner ).Digging 20 shallow 10 feet wells,  leads one nowhere. Similarly, changing one’s investment strategy completely based on the current darling of the market, is  the path to perdition.  We tend to convince ourselves by giving self-serving logic when we do such foolish things. But, it will come back to haunt us.

There is no alternative to having a clear plan, with proper asset allocation and sticking with it. Changes can be done, from time to time based on changing circumstances and evolving risk-return conditions. But, it just cannot be abandoned or overturned. Think  well before taking the plunge.