My Investment Journey…

source

There came a time in my investment career, where my fear of market fluctuations outgrown the desire to build wealth. Please read the full answer to know How it happened? and What I did then?

Otherwise directly go to TL; DR (available at the end of the answer) you will find my shortest answer to the question asked.


In my early days of investment career, I used to put money in a set of mutual funds and then tracking their performance monthly (sometimes daily) to know whether the funds are making money or losing money. Since I am a conservative investor, I used to diversify my investments across several mutual funds (debt, equity multitap, equity sectoral etc.) to avoid potential loss. At that time my only objectives are

  1. To beat inflation (10% per annum, value I considered) by maximizing my returns as much as I can.
  2. To get some good amount of real rate of return (Return on Investments — Inflation rate).

Day by day the process is becoming hectic, since my investment capital is increasing I am becoming more and more afraid of market fluctuations. There came a time came after four years, where, my fear of market fluctuations outgrown the desire to build wealth, I sold all my units and went back to fixed deposits and gold (physical).

After some days in solace, I re-evaluated my portfolio,

My returns over the past 4 years are not bad, (12.57 %), I was able to beat inflation 2 times in the four years, for me it’s a good performance. Then what I did is, I re-evaluated my objectives and strategies to find the reasons for “why I was afraid?”.

What I found is, I am always concerned with whether my investments are doing good or not — with respect to benchmark (for me its inflation, 10% per annum).

I never thought about, “Are these investments are on track to fulfill my real financial goals?” — I am absolutely clueless. I have a general idea about my real financial goals but they are not clear and specific.

My general idea of investing is to “build wealth”. I never tried to understand, what does the very word “wealth” mean to me.

  1. Is it enough money to retire, how much is enough?
  2. Is it financial freedom, how much do I require to be financially free?
  3. Is it to build a home, how much do I need to build my dream home?
  4. And so on…

The saddest and funniest reality in my case is though I am getting sufficient CAGR, my investment capital is not sufficient to meet my goals, I have to find ways to invest more.

I think this is the case with most of the retail investors. The problem here is “not the market fluctuations” but our doubt about “Whether I can fulfil my real financial goals on not?”.

I am pretty much sure that “if you are very clear and confident, that these market fluctuations do not affect your real financial goals. Do you leave stock market?” — I think not, moreover you will do opposite, you will put more and more…

Then what I did is

  1. Instead of investing for returns
  2. I started investing for goals, (Goals Based Investing),

There is a difference between the above to cases, in the former case your risk is generalized i.e. overall risk whereas in the latter case you will be able to know how much risk you can tolerate over a particular goal. In reality some goals are highly valuable (you cannot take more risk) and some are less valuable (you can take more risk).

Note: This is not my discovery, I just studied the literature, understood the methods adopted by veteran investors and developed my own framework.

Below mentioned is a Three step process,

Step 1: Understanding your goal

Understanding your goals means being able to answer

  • What is the goal of your investment?
  • How much money is required?
  • How valuable is your goal?
  • Retirement, children education, building home, emergency fund etc. are highly valuable.
  • Foreign tours, buying latest gadgets, etc. are less valuable compared to above goals.

Step 2: Choose a strategy and invest

Strategy means investment instrument such as stocks, Mutual funds, FDs etc. Conditions for selecting a strategy, you can use any portfolio screener for this purpose (I prefer screener developed by valueresearchonline.com)

  • Should be cheapest -
  • Less costs such as expense ratio, entry and exit loads etc.
  • Reasonable growth indicators (such as standard deviation, Sharpe ratio, alpha, beta, etc.…, Do not afraid… these are available in many websites)
  • Should meet your risk capacity.
  • Risk capacity — how much amount you are willing to lose . (10, 20…100 etc. % of your goal amount)
  • If your goal is highly valuable, you need to choose very conservative investment tools or a mix of risky and non-risky investment tools.
  • If your goal is less valuable, then you can go aggressive, that means you can take more risk on your goals

Step 3: Monitor your progress


TL; DR

A simple strategy that may answer your question is as follows

Step 1: Understand your goal

Step 2: Choose a strategy and invest

Strategy means investment instrument such as stocks, Mutual funds, FDs etc. Conditions for selecting a strategy, you can use any portfolio screener for this purpose (I prefer screener developed by Value research Online)

  • Strategy should be cheapest
  • Strategy should meet your risk capacity.

Step 3: Monitor your progress

Want to know more about Goal Based Investing???

Do not hesitate to comment your questions or suggestions.

you are always welcome to ask, I will be very happy if you comment your feedback…

Wish you all the best…

Thank you…

Vijay Kumar Polimeru

Personal Finance Articles

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Vijay Kumar Polimeru

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Personal Finance Articles

I will write more about Personal Finance Here

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