A few days ago one person called me and wanted to meet me to discuss his portfolio. He did not send it to me, but started talking about it. I was happy to know that he was contributing to my life by being a customer of ITC and contributing tons to the big mortgage banker of India.

I thanked him, and said ‘Having said that your life insurance, pension plans and mutual funds all need a re jig’.

He was convinced that I was God sent and I would spot the next Wipro, Infosys, etc. or maybe even the next Facebook and Google.

I had to quickly bring him down to earth, and sat down to ask his expectations – he had a very small direct equity portfolio. So quickly I told him why his ulips, pension plans, and about 10 equity schemes had to go. Then he had to concentrate on about 7 schemes of which 3 were debt schemes.

He felt that one good scrip (like a Wipro, 1980) would dramatically change his life and he could become the King of Somenagar. I had to tell him that the concentration on ‘r’ is so wrong. Assuming that between us we could spot 5 shares – and he put in Rs. 10 lakhs in each of the shares today in 2014.

Say in 2030 we do a review and his portfolio of those 5 shares looks as follows:

the returns on the shares were : 16%, 21%, 4%, and 0 for two companies – which went bankrupt. Overall he got about 13% p.a. CAGR from 2014 to 2013. He has a total corpus of Rs. 4.14 crores.

Now instead of this AMAZINGLY risky strategy if he had put say Rs. 50L in an index fund AND DONE AN SIP of say Rs. 100,000 per month (of course he is capable of doing this) …and the index had also done about 13% – and assume his equity mutual fund portfolio had done about 16% during this period, he would have Rs. 20 crores.

What did he have in this period of 16 years? Peace of mind. He had to concentrate on 2 things – the amount that he had to invest, and the period for which he did not touch the amount.

INSTEAD OF CONCENTRATING ON “R” concentrate on how much more you can save / invest and how efficiently you can manage the money. All he needed to do was to concentrate on a few funds, dump the pension plans from life insurance companies (they have low yields and terrible tax implication even as an annuity). He would have been getting about 4-9% kinda return on about 70% of his portfolio. I had to just readjust / re jig the portfolio and give it more equity orientation, a sensible amount of SIP (all the savings from the endowment plans and pension plans)…and had to tell him the following:

Compounding worked for your grandfather, for your father and will work for you. It is mathematical, not skill based.

Concentrate on ‘n’ – not touching the portfolio for real long stretches of time. Term insurance and Medical Insurance can give peace of mind ONLY AND ONLY if you are sure that you have filled the form honestly, paid premia regularly, and told your nominee about the policy!!

Concentrate on your work.

Let the index or say  a fund manager do his job.