New year, old resolutions
It’s that time of the year again. A time to look back, reflect and ruminate. It is also a time to look ahead, resolving to learn from our past mistakes.
The year gone by has been a year when the point of equity returns being lumpy and non-linear was driven home forcefully. The benchmark indices rose around 25 per cent, much against everyone’s expectations and forecasts. But such is the nature of the game. Equity returns are lumpy and not linear. Periods of slumber are followed by sharp bursts of performance. Investors, who attempt to time every move in the market often end up disappointed. This leads to widespread aversion towards equities, which in turn sows the seeds of the next bull market.
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While shifts in market cycles rarely coincide with the turn of a calendar year, this is as good a time as any to re-orient ourselves and jettison certain calcified behavioural tendencies which may be detrimental to our financial well-being.
Here are a few new year resolutions which you can keep in mind:
I will not deviate from my pre-determined asset allocation: Asset allocation is often determined at the beginning of each calendar (and sometimes, financial) year in consultation with your Certified Financial Planner. However, during the course of the year, we could fall victim to various influences and be tempted to deviate from the same. More often than not, this is detrimental. Some investors prematurely broke their fixed deposits (FDs) and piled onto equities during the latter half of 2010 (much to the chagrin of their Financial Planners) as they felt that their FDs were not providing high returns. In end 2011, these very investors contemplated selling their equity holdings at a loss and investing in gold mutual funds, merely because they had performed exceedingly well in the recent past.
'Rear-view’ investing will only lead to dejection. In any given year, some asset class will always outperform others. As we are not prescient enough to know this asset class in advance, it is preferable to be invested in various assets in that proportion which suits us best, based on our temperament and financial goals. Revisit this allocation either once a year or if there is any change in your financial circumstances. By doing so, we will be increasing our holding of the underperforming asset (for 2011 it was equities) and booking profits in the ones which have performed spectacularly (Gold Funds).
I will not predict anything: It is tragic to see the number of man-hours wasted in making predictions (although it does provide jobs to many in the financial markets). We all will be happier if we come to terms with our inability to predict anything, let alone something as nebulous as market movements. It is preferable to channelise that energy into more productive activities. If you do not predict you will also spare yourself a lot of disappointment, because most predictions invariably go wrong.
I shall not remain glued to business channels on TV: Just as we admonish our children when they watch too many cartoons, they too should caution us against watching business channels (except, perhaps, for entertainment value, and that too for only 30 minutes a day). First of all, most ‘experts’ who appear on such channels indulge in making predictions. Then their time horizon may not match yours. For instance, long term may mean one year to them, while for true investors it may mean at least one business cycle. Finally, there is no accountability for such predictions. For instance, several experts predicted in January 2012 that since infrastructure stocks had fallen steeply, they would handsomely outperform the Sensex over the next one year. Come December 2012, only a few have actually done so. Of course, they will have myriad reasons as to why their predictions were off the mark, but that hardly helps viewers.
I will bolster my knowledge: If you believe you are capable of taking personal finance related decisions yourself, it is imperative that you equip yourself with knowledge from the right sources. However, given the numerous options available, it is equally vital to know which sources to avoid. Do not attempt to take short-cuts by standing on the shoulders of giants. You should go one step backward and gather knowledge from primary sources such as books on investment or personal finance written by credible and acclaimed authors whose statements have stood the test of time. Benjamin Graham and Robert Kiyosaki are two such examples.
I will befriend the internet: Today, besides acting as a fount for knowledge, the internet has also emerged as the most cost-effective execution tool, be it for banking transactions, term insurance or mutual funds. Two good examples are online term plans and the soon-to-be launched ‘Direct Plan’ for mutual funds Hence, those who are “internet-phobic" could resolve to surmount their fear in 2013. This could also end their reliance on ‘advisors’ who are merely glorified executors.
If we focus on implementing these resolutions to the best of our abilities during 2013 we may avoid welcoming 2014 with Joe King’s memorable quote “New year, same goal".
The author is Head – Marketing PPFAS Asset Management Private Limited