In the wealth management business, there is one factor that we consider even more important than risk appetite. And that is the life cycle factor: the appropriate investment approach is first and foremost guided by the client’s age.
The younger the client, the more “telescopic” the investment mix. After all, as Warren Buffet said, his favourite holding period was “forever”. For example, a pre-teen's portfolio with inherited wealth calls for an especially “deep value” portfolio. A teenager’s portfolio, on the other hand, entails a slight tilt (only slight) towards near-term withdrawals. At the other extreme, a 70-plus dowager’s portfolio merits almost total exposure to government bonds with interest and total safety.
Why is long-term investing fundamentally different from just investing? After all, investing is all about finding the right idea (or mix of ideas) to put your money into. The difference in long- and short-term investing arises out of the different expectations that we have of the timing of returns. It also has to do with the terrific (and almost always underestimated) power of compounding. Let’s look at each factor separately.
Expectations on returns on your investment change predictably with time or life cycle. Once you hit the earning age, the younger you are, the better your chances of meeting sustenance with your current income. You don’t need your savings to meet your expenses. In fact, you are typically a net saver at this stage. As you grow older, your spending decisions get bigger—marriage, vehicle ownership, children, property and medical bills pop up in some sequence.
Soon enough, your income (although rising) needs a little help from your early stage savings (hopefully the earnings have compounded in style by then) for your ever-rising spending appetite. Which brings us to factor number two—the power of compounding.
Exponential wealth creation is possible in equities only if two conditions are fulfilled. One is, of course, the quality of stock picking (or decision making). And the other is the condition that the money is left alone for adequate time. If you are patient and don’t need to dip into your savings early in life, wealth managers can look for opportunities to multiply your wealth.
This patience is rare in a client, and literally must be “earned” by the fund manager. It is this patience that empowered the wiser stock pickers in the fund management community to back stories like Bharti Tele, Hero Honda, Pantaloons, Carborundum, Bhel, L&T, Shree Cements, Greaves and Praj. For the record, our research also spotted mid-caps like Matrix Labs, Opto Circuits, Voltas and Texmaco. And yes, there are many more out there.
High-quality management, in favourable business conditions, almost inevitably delivers terrific returns. But these returns may not occur in linear fashion. Sometimes, what’s good takes time to deliver. And it’s a little unpredictable. Again, there are many companies that don’t deliver.
This is why deep value investing, though very lucrative, is difficult to practice and hence unpopular among investors as well as fund managers. But for today’s India, which is demographically skewed towards the young, educated and productively employed, this is perhaps the only way to manage wealth.
(By Dipen Sheth, Head of Research , Wealth Management Advisory Services)
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