There’s an upside to online classes

One of the things that I learnt a long time ago was that positives and negatives are always mixed together. No such thing that’s entirely positive; no such that that’s entirely negative.

Children having to stay home and go to online classes is challenging for the most part. But it also has a benefit. Watching your children be part of a classroom is such a heart-melting experience. In a classroom setting, children act differently than they’d with their parents. Seeing this other side of their children, I think, would be a heart-melting experience to many parents.

Image source: PixaHive.com

Can I keep some money aside to invest during market crashes?

I was having a chat with a friend about having some money set aside for “buying the dip” when there is a sudden market crash. This conversation allowed me to think deeper about this idea and made me realise that keeping such a corpus is nothing but FOMO (fear of missing out) pretending like a legitimate investment idea.

Image source: pxfuel.com

The downside to having an “opportunistic investment” corpus

• It’s not clear what a “dip” even means, for someone to buy the dip. Let’s say you set aside some money in 2021 for “buying the dip”. In 2026, let’s say the market falls by 15%. Should you buy this dip? If you had invested this money in equity in 2021 itself, your corpus will likely be worth more even after a 15% fall! Should you buy this 15% dip or should you wait for a harder fall?
• Inferring from the previous point, you are actually giving up real gains today for speculative gains in the future. You keep the money liquid and earn low returns with the hope that some day the market will fall very badly. Are you okay with this opportunity loss?
• Let’s say you see the market fall drastically, say by 40%. You go all-in and deploy your entire opportunistic investment corpus in equity. Now, are you sure that the market won’t fall another 25% after you have invested? Opportunistic entry requires knowing where the bottom is (which is unknowable in advance).
• How would you know how long you need to wait before your opportunistic investments give a big yield? When do you pull out and replenish your opportunistic investment corpus so you can be prepared for the next crash? Opportunistic exit requires knowing where the peak is (which is, again, unknowable in advance).

What can you do with excess cash then?

Let’s say you have fulfilled all your goal-based investment targets, but you still have some money left. What can you do with that money? Like everything in personal finance, there is no right or wrong answer here. I’ll go over what I’d personally do, and that might give you some ideas.

1. To make the goal plans more robust, increase expected inflation. If I have assumed an inflation rate of 6%, maybe I can change it to 6.5% or 7%, just to be on the safer side.
2. If it makes sense, increase the goal budget so we can afford a bigger car, a more expensive college education, or a more exotic vacation.
3. If I still have money left over, I’d pick an asset allocation suitable for idle investments. This “idle corpus” is invested based on my risk appetite: a part of the corpus will be in stable investments so I can take the money out if needed; the rest will be in growth assets such as equity.

That’s my strategy. Does this mean I might never buy the dip when there is a crash? To the contrary, I’ll be better positioned to buy the dip than those who are waiting with liquid cash.

Whenever there is a dip or a rally, the asset allocation will get skewed. I’ll know exactly how much money to spend on buying the dips or exactly how much profit to book. If the market continues to fall for years, I’ll continue to buy the dips because the asset allocation keeps changing and more equity is needed to reset it. Likewise, if the market continues to rally for years, I can continue to book profits.

So the bottom line is that if you can pick a target asset allocation that you’re comfortable with, regular rebalancing is all you need to take advantage of market fluctuations. Just make a plan and stick to it.

Picking the right asset allocation is actually very hard. The right asset allocation should remove your worries about excessive loss. At the same time, it should also remove your worries about missing opportunities to buy the dips. Spend your time and energy in figuring out where your sweet spot is. That’ll make you richer and happier than most other investment tactics.

Rebalancing requires conviction

When I started investing 1½ years ago, I was looking forward to rebalancing my portfolio. One asset class would have done better than the other and I’d either be safeguarding the excessive profit or buying the dip, I thought. I expected this to be a thrilling and pleasant experience.

When I did have to rebalance my portfolio earlier this year, however, it was not as pleasant as I had thought. I found myself hesitating to sell equity to buy debt. “The interest rates are so low, should I really invest in debt now?” “Maybe I can keep the higher equity allocation for some more time and make the most of this bull run?” These were some of my thoughts.

Image credit: QuoteInspector.com, licensed under CC BY-ND 4.0

When I sit down and think about this hesitation, I am realising that:

• It’s easy to have conviction and discipline while discussing hypothetical scenarios. When it comes to actually following through with action, it can be hard.
• Unless the investor emotionally prepares themselves, rebalancing will likely be an equally difficult experience every time. Because, we’ll always be dumping recent well-performers in favour of recent ill-performers.

My next task is to think about the whys of rebalancing and emotionally prepare myself. It will also help to do some backtest to see the performance difference between portfolios with and without regular rebalancing. Quantifying the difference is an easy way to get the conviction I’d need.

Maybe the real takeaway is that I am rebalancing the portfolio only because they say it’s necessary, and not because I know it’s necessary. “Because they say” is seldom a convincing reason.

Ice creams are fun!

You like a certain pillow and a blanket in your house. They are your favourites. You bring them to the living room and put them on the floor when you watch TV. Because why not? They are your favourites after all.

You suddenly remember the 4 ice creams that are kept in the freezer. The freezer is a bit too high, but you can move your brother’s study desk and stand on it to reach the freezer; no big deal. You take the entire box with 4 ice creams and bring them to the living room. Did you close the freezer? Maybe you did, maybe you didn’t. But you’re too thrilled to worry about that now.

You take all 4 ice creams out and spread them on your favourite pillow. They are all different colours and you’re amused looking at them. But ice creams are tasty too. You eat them all in random order. Take one bite from this, and immediately get attracted by the other one, so one bite from that.

You don’t have the appetite to finish eating 1 ice cream, let alone 4. The ice creams are all meting. So you do the next best thing anyone can do: play with them. Spread the molten ice creams everywhere on the floor, on your favourite bedsheet, on your favourite pillow, on your clothes, everywhere on your body. It’s all super fun. The coldness and the gooey texture of the ice creams add to the fun.

When the ice creams are all fully molten and spread everywhere, not much is left to play with. You leave the place and go somewhere else and start a new game because you’re creative enough to invent a dozen new games everyday.

If you’re my daughter Anjana, this is something you’d casually do on a weekday afternoon. She’s probably thinking now, “Whether you eat them or play with them, ice creams are always fun!”

Look before you leap: the temptation to invest in gold (again)

A new issue of Sovereign Gold Bond (SGB) is currently available for purchase, and that’s what I see everywhere I look. Everyone sells SGBs and everyone is advertising them big time. Understandably so, since gold is one of the most favourite investment vehicles of Indians.

I decided to not invest in gold sometime back, but still, the temptation caused by these promotions made me consider buying maybe a few grams. Then I came across these 2 at the right time:

• Radhika Gupta of Edelweiss Mutual Funds advising investors to not give into the FOMO (fear of missing out) and checking past rolling returns of the asset before investing.
• A post on FreeFinCal showing that the 8 year returns on gold has been anywhere from -7% to 23%. Even when held for 15 years, the possibility of negative returns don’t go away.

The highlight here is that neither of these is new to me. I knew I didn’t want to invest in gold; I knew I had to look at rolling returns before purchasing any new investment asset. Yet, I had the temptation to buy SGBs.

Moral of the story? It’s hard to keep your head steady when there’s so much noise around you. Remain focused, and remain with conviction whether you decide to invest in a certain asset or decide to not invest in a certain asset.