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Business News/ Money / Personal Finance/  Subtracting your way to success with investments
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Subtracting your way to success with investments

Most of us tend to panic when the equity market starts to fall.

Subtraction can sometimes be powerful in creating simple and effective solutions.Premium
Subtraction can sometimes be powerful in creating simple and effective solutions.

In 1948, the McDonald brothers, Richard and Maurice, temporarily closed their then barbecue restaurant to streamline their entire operation. When they checked their sales, they discovered that the majority of their business was coming only from a few products (mainly hamburgers). Now, they had a bold idea: why not focus only on the best-selling products? They cut down their menu from 25 items to just 9! This move proved to be a game-changer for McDonald’s. By narrowing down their offerings, they could enhance the food quality, lower costs, and serve more customers efficiently. The rest is history!

But it wasn’t just the McDonald brothers. When Apple’s Steve Jobs returned in 1997, he axed over 90% of products, leaving only 10. He focused on a few products where Apple could be the best. Jobs’s advice to Nike’s new CEO Mark Parker in 2006 illustrates his thinking: “Nike makes some of the best products in the world. Products that you lust after. But you also make a lot of crap. Just get rid of the crappy stuff and focus on the good stuff."

When we want to improve something, we have two options. We can either add new stuff or take away stuff that’s already there. This is true for ideas, products and situations. But we generally default to thinking about what we can add. Adding feels natural while subtracting requires deliberate effort. So we almost invariably decide to add things without even considering other potential subtractive options.

‘Subtraction’ can sometimes be extremely powerful in creating simple and effective solutions. While there is nothing inherently wrong with adding, if it becomes the only path to improvement, we may be missing out on potentially better solutions.

When we keep adding and over-diversifying across many equity funds, we unintentionally accumulate hundreds of stocks, resulting in overlap, portfolio clutter, and diluted strategies. A simple solution would be to create a cap on the total number of equity funds in your portfolio, say maximum of 6-8 equity funds. Such constraints force prioritization and focus. Any fund in your portfolio should be at least 10% of your portfolio. Given that 10% is meaningful, this will force you to deliberate on whether the fund is really required. Create an ‘Ignore’ list of categories that you feel are unnecessary or complicated for your portfolio. For example, you can say no to sector/thematic funds, multi-asset funds, etc.

The biggest drivers of your investment outcome finally boils down to your savings rate, equity exposure, rebalancing, diversification and time horizon. You can build simple personalized rules around them. For example, a savings rate greater than 30%, equity exposure at 70% (based on risk profile), rebalance if deviation exceeds 5%, diversify across 5 different investment approaches (value, quality, growth, mid-cap and global), more than 7 years time horizon, etc. You can also build simple rules around recurring decisions such as ‘how to invest one-time money’, ‘how to invest monthly’, etc.

Most of us tend to panic when the equity market starts to fall. Instead of trying to make decisions in the middle of a market fall, you can remove these decisions by planning ahead and pre-loading your decisions. The pre-loaded written plan can be as simple as: What should I do if the market falls 10%, 20%, 30%, 40% and 50%. SIP is a great way to automate your monthly investing. It takes out emotions and ensures you invest every month with discipline.

Once you have built the right portfolio and plan, make ‘do nothing’ the default action majority of the time. Keep a high threshold for portfolio action. Reduce frequency of monitoring news and your portfolio. The perennial flow of bad news makes it hard not to react, and the emotional pain of temporary declines also increases as you monitor more frequently. Portfolio reviews once every 6-12 months should be sufficient.

There is an inherent bias for new stuff over the old. This liking for new takes the form of temptation to add new funds, leading to unnecessary clutter in your portfolio.

Arun Kumar is VP and Head of Research, FundsIndia.

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Published: 05 Nov 2023, 10:32 PM IST
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