Creation Vs. Preservation

Everyone aspires to create wealth…

  • Some create enormous wealth in short span of time, others require little longer time horizon.
  • Some are able to create wealth at a blistering pace, others require patience and persistence.

Generally speaking, if you earn more, spend less and invest you end up creating decent amount of wealth in the medium to long run.

Creating wealth is one part but preserving wealth is an entirely different ball game. You need to have different approach while preserving wealth than the one you had while accumulating wealth.

Wealth creation is the accumulation of assets and income over a stipulated period of time. On the other hand, wealth preservation is the efficient management of all personal assets

Wealth Creation and Wealth Preservation

The Central concept behind wealth creation and preservation is to ensure that, your money doesn’t stay idle and in turn lose its spending power. Products like real estate and equity help in wealth generation, properly employed bonds, Debt Mutual funds, gold and other such securities can help with wealth preservation.

In order to protect your wealth, follow a “spread it as you build it” approach. The strategy is to disperse and diversify your wealth across the aforementioned asset classes and categories.

When you’re distributing your wealth, it’s important to keep the following points in mind:

When markets are on Song and you are making good returns on your investments everything seems good but, when the markets are down, it is important to prioritize your goals until they stabilize or bounce back. At such a time, pay heed to critical goals that can’t wait, such as medical bills or your children’s education. Once you shortlist your critical goals, it’s a good idea to allocate assets for the rest of your goals based on importance and availability. “Don’t put all eggs in the same basket” is a well-known mantra one should follow. Having a “B” Plan is important in ever changing world of investments. You can’t always predict your goals. A sudden turn in events can instantly hamper them. In such a scenario, it is important to have a ready corpus of accumulated wealth for critical goals. Many a time, it is the funds kept aside for non-critical goals that act as a reserve for critical goals. Asset allocation and Rebalancing, evaluate your portfolio every three months. This will help you reorganize your portfolio in case your debt and equity proportions are out of place.

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Success formula for Investing

As novice investors, many of us are fascinated by successful Investors. We want to invest in next big idea, the best fund or in some strategy which will yield us an extraordinary return. We start searching the internet and right from Warren Buffett to Porinju we see people who have made big money in the capital markets and try and replicate their success formula.

What is Important is Understanding why, what, where, how?

As a novice investor one needs to understand why is he/she is investing? What is the time horizon? Where is one investing? What suits one’s personality? How one should plan and execute? And many more.

Capital markets is a dynamic place which is influenced by hundreds of factors every second. There are tens of asset classes, thousands of products to choose from. Every asset class has different characteristics and provides good/bad returns in different time frames.

“Understanding cycles and having the emotional and financial wherewithal needed to live through them is an essential ingredient in investment success”

Howard Marks

But again not everyone can do it successfully and mistakes have big costs.

Important thing to understand is, generally many of us are not full-time investors and we need professionals to guide us through market volatility. This said, there are some basis rules which can help you make money successfully.

Basic framework for successful investing

  1. Identifying Time Horizon for Different Needs and Investing Accordingly – Identifying Short, medium and long term needs and allocate money accordingly.
  2. Following Asset Allocation Discipline – Not putting all eggs in the same basket, and more importantly reducing exposure in particular asset class when it is overheated and investing in an asset class when it is underappreciated helps.
  3. Determining What Investment Strategy Works for You – Understanding what strategy suits your personality or in other words, matching your ability to take risk with your willingness to take risk is important. Investing in something which causes sleep loss at night is not at all worthy. 
  4. Emotional Discipline – To be a successful investor you need to have emotional discipline. Behavioural biases erode wealth big time, you need hand-holding by someone who understands these biases and will guide you to the right path.
  5. Be Willing to Learn – The market is hard to predict, but one thing is certain: it will be volatile. Learning to be a successful investor is a gradual process and the investment journey is typically a long one. At times, the market will prove you wrong. Acknowledge that and learn from your mistakes.

Happy Investing !

Asset Allocation

Market moves in cycles and different strategies work in different phases of cycles. Identifying cycles and positioning the portfolio accordingly can be tricky at times. One simple way to overcome this difficulty is “Asset Allocation

Asset allocation is the process of deciding what percentage of your money to put into different asset classes such as stocks, bonds and cash.

Each asset class responds differently to shifts in the economy and financial markets; some investments may be up while others may be down. With asset allocation, a portfolio may experience less fluctuation in value than individual assets within the same portfolio.

Having a disciplined approach towards investing helps in generating above average returns. Investing with discipline involves selecting investments that are in line with an overall asset allocation and diversification strategy based upon your needs, goals, time frames and your ability to assume risk. To meet their goals, investors must carefully identify their financial objectives and an investment mix to help them reach those goals.

Higher the risk, higher the reward – Is This True?

It is generally believed that, Higher the risk, higher the reward. But Asset allocation helps you in achieving similar (sometimes better) returns with lesser volatility. To give an example, since January 1995 we analysed HDFC Equity Fund and HDFC Balanced Advantage Fund (earlier HDFC Prudence Fund). Both the funds are from the same fund house and are managed by the same fund manager in a similar style. While HDFC Equity is a Multicap fund, HDFC Balanced Advantage fund is an asset allocation fund having close to 75% equity and 25% debt exposure.

As seen from the table, HDFC BAF has delivered better Risk-Adjusted Returns

Asset allocation technique may have a significant impact on the ultimate success of your portfolio. In fact, asset allocation has more influence on portfolio variance than any other single investment decision. In an important study published by the research team of Brinson, Singer, and Beebower in 1991, asset allocation was shown to account for as much as 91.5 of the variation in total return, far outweighing other significant factors such as market timing and security selection.

Developing Your Investment Strategies with Your Advisor

For deciding your Asset allocation framework, the following factors are to be considered:

  1. Time Horizon
  2. Risk Tolerance
  3. Investment vehicles
  4. Planned current and future contributions
  5. Goals

Asset allocation is not a static strategy. To be effective, an asset allocation plan should be reviewed periodically. Also, any changes in your financial goals, lifestyle, time frame and financial circumstances coupled with changes in market conditions, could necessitate revision of your asset allocation plan.

Have you done your and your portfolio’s annual health check-up?

Word ‘healthy’ prompts an array of words in my mind viz. strength, endurance, longevity, immunity. Add responsibility to that and it gives a sense of comfort and security. A HEALTHY PORTFOLIO is what you can count on. It is a manifestation of thoughtful planning, good and consistent feed, continuous attention and adaptation. As a primer, I am highlighting broad aspects of portfolio management.


Macro-economic environment

“Is our economy doing well?”
“Is the inflation too low or high?”
“Are commodity prices rising?”
Where’s the currency headed?”

Answers to these and many more questions influence asset allocation decisions dictating how much of the portfolio should be in debt, equity or alternative assets such as real estate.

Micro-economic environment

Industry and company specific aspects that define productivity (Return on Equity, Return on Capital), profitability (Profit Margins) form micro-economic environment. This guides in selection of securities and/or investment vehicles in each asset class.

First part of portfolio health-check will focus on whether asset allocation is right for current environment and client’s life cycle stage, assets, liabilities, income, expenses etc.


Portfolio management at its core is management of risks to maximize the rewards. Portfolio must endure the adversities and thrive during conducive environment. Some elements of construct are:

  • Asset Classes: Am I aware of various assets where I can invest such as fixed income (debt), equity, alternative assets (real estate, commodities etc.). What are the ways in which I can invest in these?
  • Diversification: Have I put all my eggs in one basket? Do I hold excess of fixed income (such as PPF/FD) or I have excess of equity shares? Have I considered my homes as investments? Balance is always better!
  • Liquidity: If need arises, how much can I convert to cash without compromising on fair price? A distressed sale will add to worries during emergencies.
  • Risk & reward management: What is the correlation of my portfolio with my income source? Will I lose both at the same time? What are my post-tax returns? Is there a tax-efficient way of investing?

Review and Management

Whatever is built must be reviewed, maintained and managed with due respect to changing environment.

Is there an ideal review and re-balancing schedule?

How much value professional help will add to my portfolio?

Have a healthy and wealthy portfolio!