For long-term wealth creation, there is intelligence in inaction

I recently conducted a training programme for financial planners, where I presented a case study of a couple with a three-year old child, who were employed, serviced a home loan, invested in financial and non-financial assets, and were adequately insured. I asked the participants to rejig the financial plan and align it more towards the couple’s short- and long-term goals.

The participants offered several recommendations. Some said the loan had to be closed, some interjected that the portfolio needed more real estate allocation, others pointed out the urgency of a pension plan and yet others felt that the couple needed to take more risk with their money. They were all wrong. Among a roomful of participants, no one thought the plan was perhaps fine the way it was.

I tell my clients that as for investments, boring is best. By boring I don’t mean complacency in managing money. I mean the belief that if they stayed true to plan and had the patience to stick out the hiccups, the future outcome will likely be positive. Not written-in-stone guaranteed, but predictable to a high degree.

Creating wealth is not about getting the highest returns. High returns come with high risks, and when the investment fails, your confidence in making right investment choices takes a plunge. Wealth creation is about getting consistent returns. Earning consistent returns isn’t about doing something drastic or contrarian in your portfolio. It is about maintaining the right investment behaviour and staying true to your asset allocation.

Proper investment behaviour helps you stay aligned to your goals, so you don’t waver in the face of market upheavals. Leaving your emotions at the door and staying your course are virtues that will eventually make you wealthy.

Asset allocation is the crux of long-term planning. Asset allocation assumes that volatility is the nature of the beast and give you with the wherewithal to roll with the punches. Let’s say you wanted to buy a house in 2009 and started to plan for that in 2005. From 2005 to end of 2007, your conviction in the markets would have grown. And then, wham, you were hit by the 2008 market crash. Did that mean you had to abandon the plan to buy the house? No.

If you had the right asset allocation, you would have had adequate cash flows to manage short-term needs. You could have continued investing right through the crash, possibly moved assets from debt to equity and invested at cheaper levels. You could have even bought a more expensive house or taken a smaller loan, when the markets recovered a few years later.

The problem with most investing decisions is that you are overly optimistic about the outcomes. Being conservative is considered a sign of defeatism or pessimism. But that is not true. Factoring in low-probability, high-impact events can help you stay your course for several years. You must realise that big wins are few and far between and even less predictable. The winner of a marathon is not the fastest runner, it is the steady runner.

I often talk about the power of compounding in my workshops. I am always staggered by the results investing a small investment of ₹ 5,000 over a period. Our house help bought a house with the money she saved over 15 years. There was no investment strategy here. She wasn’t tracking her portfolio daily and looking for the next big investment idea. She did what was in her control, which was to put away consistently.

I come back to my original point, which is: humdrum, unexciting, monotonous is good. Don’t let short-term uncertainties affect your long-term plans. All you need to do is wear the “I like boring” badge with pride.

Priya Sunder is director and co-founder, PeakAlpha Investments