Is Investing really that difficult? Does the financial services industry make a simple thing sound very complicated? or is it really tough?

What do you think?

I think that creating a good portfolio is not very difficult. It is sitting tight letting the portfolio that we cannot do easily. When I do sessions for the lower end of the population I don’t get into complicated Compound Interest formulae. I just tell people – compounding is like planting a mango tree. Without being able to guess how many mangoes the tree will be able to produce in a year (or over its life-time) we are able to enjoy its fruits, are we not?

Creating a portfolio maybe easy – say 50% in a Nifty etf, 30% in Nifty Next, and 20% in some direct equity – shares like say PnG will never find its way into indices, so it will make sense to hold such shares on a direct basis. Meet your debt requirements through PPF, and you are almost done.

That was the easy part.

However, sitting tight during difficult times is not as easy as we think. It is like standing still when a tiger is sniffing around your toes and ankles. Some of us have done it in the past. Does not mean that we will be able to do it during the next trip of the tiger. No. It is not easy. We think constructing the portfolio is difficult, but it is the sitting tight that is made tough, because constantly we are asked “how many mangoes this year in your tree”. Actually we don’t have to answer that question for ourselves or for our friends. As long as you enjoy the mangoes, you are done. Your money should be available to you when you need it to meet your goals. That is all.

Today you can get an exposure to the world MSCI Index sitting in India. You are even allowed to invest upto US $ 200,000 abroad – and there is no need for you to bring it back! So you can have a world equity portfolio – and assume that it is well spread out. Over long periods of time (upwards of 10 years) expect bonds to outperform shares. Of course there can be exceptions, but largely equity will (well selected indices or etf) outperform a debt portfolio. Of course debt funds are still better off than bank fixed deposits – where you pay tax on an yearly basis. Clients (and IFA advising clients) should concentrate on RISK. Risk is just the other side of return in the investment coin. If you keep concentrating on risk, return will follow. You can enjoy the return. However, if you keep talking about return, when risk comes both you and your client are ‘shocked’ that it came!

At the lowest levels in 2009 a full equity portfolio lost 55%. Percentages hide the pain so insert your portfolio amount and then try to imagine how you’d feel. What if you had a Rs. 300,000 portfolio that goes down to Rs.135,000. Sounds bad? terrible? horrible? What if it turned into Rs.180,000 (70/30)? Still too painful? Do this until you find a potential point of comfort (no not easy). What happens if the figure is Rs. 3 crores instead of Rs. 3 lakhs? How will you react to that?

Nothing will replicate how this actually feels but if you can’t stand the idea of losing 40% in theory then you definitely can’t stomach this in real life. Remember you can lose up to 10% even in bonds. Are you ready for that…..If not, equity is not for you. Then, neither is retirement meant for you.