Appeared on BTVi – MF Specialist
Benjamin Graham: “While enthusiasm may be necessary for great accomplishments elsewhere, on Wall Street it almost invariably leads to disaster”
Often Investing is backed with Enthusiasm. People find it funny to talk about asset allocation and during the best of the time in the market, cardinal principles of investing are most ignored. The confidence is at its 52 week high, Investors turn into advisors, and enthusiasm is higher, with only way to go that is upwards.
One cardinal principle which is most violated is “Strategic Asset Allocation”. There is a science behind this. In a nutshell, this is a function of one’s risk tolerance level. This is derived from a risk profile test. Essentially it determines the downside risk one can stomach. Following a process, one arrives at a Strategic Asset Allocation which is a mix of Debt & Equity at its core level. Each portfolio mix ranges from a 100% debt to 100% equity and a range of portfolios in between the scale.
Often investors venture into an investment with such enthusiasm that in shorter run they often do not realise the detrimental impact of their choice without understanding their own risk tolerance. This tolerance is hardwired into a human and surfaces when the risk environment undergoes a change, embedded into human behaviour for generations.
This very anxiety and intolerance to a level of risk for a future return leads to escape buttons leading to sell off in the investment portfolio. One of the reasons is not following a systematic procedure before investment was done. The degree of anxiety can vary from person to person but this is often witnessed when markets are hostile and investors find it difficult to handle the uncertainty which the market brings.
Wealth creation to Wealth destruction phase might be not a long one if asset allocation is ignored. In long run it costs more than we think. Hence an investor return is always different from an investment return. The difference is the human behaviour which brings subjectivity, emotions, enthusiasm in the process which often leads to confusion and that further leads to self destruction of wealth. Hence investing is a science and an art and both have their own merits in the investing process.
Benjamin Graham once said “Abnormally good or abnormally bad conditions do not last forever.”
But to stay on course never forget Strategic Asset Allocation as an inherent part of your investment process.
[Disclaimer: The author is Founder & CEO of V R Wealth Advisors. The views and opinions expressed in this article are those of the author and do not necessarily reflect that of Business Television India (BTVI)]