In a lecture series on YouTube, the late Mr Parag Parikh beautifully summarised human wants in his opening remark. The third slide of his presentation says

“We strive for

●      Security

●      Comfort

●      Love

●      Leisure

●      Respect

●      Fulfilment”

Material possessions and, more importantly, money has become synonymous with these needs. As investment advisors, it is our job to remind ourselves and our clients to distinguish these needs and follow a path to achieve them rather than just looking at very high investment returns.

If that is what we want for our client, why am I still not happy with a stock that grew 100 times in the last 20 years? I am sure the answer is different from what you are thinking.

First things first, I am a firm believer in managed portfolios and have my wealth allocated to equities through mutual funds or PMS. This stock was bought by my father as a private equity investment of a bank, succumbing to pressure from the branch manager. Fifteen thousand invested in 2001 has grown to Fifteen Lakhs in 2022, a hundred times growth, resulting in a CAGR of roughly 25%.

The point is that it was an insignificant allocation in the portfolio, and after such staggering growth, it is still not a meaningful percentage of my holdings. We, as investors, strive for the best security selection, looking to invest in the next multi-bagger, whether it’s a stock, real estate, or even non-traditional avenues like cryptocurrency. The greed for the best returns has taken over the want for security and comfort. As you can see, the secret is not in security selection but in asset allocation. A small allocation to equity will not result in multi-fold wealth despite investing in the best stocks or funds. The opposite, on the other hand, can be true that a meaningful allocation to the asset class, even with average performers, can yield a much higher quantum of wealth.

This article in Business Standard suggests that Indians invest only 4.8% of their wealth in equities. The interesting part is that this is the all-time highest level of allocation. While, as a country, we are on the right path, we need to focus on asset allocation instead of trying to make high returns in the short term by looking for a small-cap stock tipped by someone.

Asset allocation in a portfolio results from your risk profile, the nature and tenure of your goals, and your existing wealth. Note that it is completely tuned to your needs and customised accordingly. Current news, policies, budgets, and many other media-hyped events have no bearing on it. It is a simple boring way to navigate the markets. In the process, it helps you safeguard from the emotional pitfalls of greed and fear.

Please share your stories where you feel security selection did not help you create wealth. Also, write back your comments and feedback.