This was published in the DNA newspaper, dated 15th of Sep, 2017
“This time it’s different”, is an oft-ridiculed cliché used in the financial markets, mostly to debunk the idea that a particular phase of the market (usually bullish) has stronger legs than similar phases in the past. Markets are never one sided though, and excesses always tend to be shed through corrections later. This has been the case for centuries of trading history.
What has been truly “different” in the last few years though, especially in the new millennium, is the pace of structural changes presenting themselves to investors. Some are planned (like GST), some related to Moore’s Law effects (like technology), and some are simply Black Swans (like the global financial crisis). Consequently, money management has become tougher. Managing wealth, with its separate, often counter-intuitive and variable sets of objectives, has become tougher still. A few closely-held beliefs need to be junked / modified in order for investors to ensure their money keeps working hard (to use yet another old cliché!).
One, asset allocation is important, but “buy, hold, forget and see it five years later” is an incredibly stupid strategy. Traditional measures of risk, eg volatility, are not by themselves able to capture the impact of severe draw-downs on portfolios due to sudden market or regulatory events. When asset allocations start getting skewed due to sharp upward movements in a particular asset class (say equities), the vulnerability of the portfolio to Black Swan shocks go up exponentially. Investors and their advisors need to be a lot more on top of their portfolios, constantly optimising the same in line with their objectives and risk tolerances.
Two, liquidity management is as important an activity as identifying the next best investment opportunity is. This is especially true of Indian investors, given their heavy exposure to real estate, an asset class most prone to liquidity issues. As it is, even ostensibly liquid instruments have been affected by liquidity issues in the recent past (the JP Morgan Liquid Fund a couple of years back). On top of that, liquidity is often completely ignored in a chase for yields and/or the next exciting investment idea. There is a time and space for illiquid investments, but it is important to define sharply both the time and the space before making such investments.
Three, indexation is a two-way street. Investors judging their portfolios against index performance when broader markets are doing well should do the same when they are doing badly. This is a key difference between managing wealth (for individuals) and managing money (for institutions). At the heart of the difference is the fact that institutions are perpetual going concern entities, while individuals have finite lifespan with (often) non-discretionary objectives. Ergo, relative performance vis-à-vis an index for an individual is an academic, rather than practical construct. In other words, managing personal wealth, more often than not, is an absolute return approach by default. By definition, absolute return approaches do not sit well with benchmarks.
Four, volatility is not an enemy of investors, it can be a very useful friend, if used wisely. The conventional wisdom is for investors to avoid volatile markets, but it is often volatile markets that present the best opportunities. Looking back, in the current millennium, some of the best entry-point opportunities in equity markets presented themselves when markets were at their most volatile – think 2004, or 2008, or even 2013! Rule of thumb is to remain calm and behave with as much dispassionate emotion as possible when volatilities spike up.
Five, and perhaps most importantly, when an individual is looking to “manage wealth”, it is important to concentrate heavily on that, and not on fund managers managing various products in the underlying portfolio. Wealth management is a far more complex, multi-faceted and involved process than only managing a pool of money (which is what fund managers do). It involves elements of tax, estate, succession and other objectives that are non-linear in nature. They require far more attention and diligence than obsessing over an incremental 1% in portfolio returns. Ignoring the former could result in much larger impact. Unfortunately, too many individuals (and their advisors) spend almost their entire attention and time-spans on evaluating product performance, and too little time on what is really critical to successfully managing wealth.
As the Chinese say, the best benediction is “to live in interesting times”. We are fortunate to live in very interesting times. It also means we need to have newer, and sometimes less “interesting” approaches to managing wealth optimally.
