Why should we invest money | Money | Entrepreneur | Millionaire Billionaire

WHY SHOULD WE INVEST?

Why do we invest? We invest because we want our money to be available for future use. We just invest because we presently do not have an immediate use for that money. When we decide to call upon it to serve our need, we expect it to be available for use. In financial planning speak, being able to meet our financial goals is a the primary objective of investing. How well we have done has to be measured only by that yardstick. 

Conversions about investing tend to get waylaid from this principle. It is due to acute focus on the investment management industry on relative performance. Much of the information and dialogue are about who did better and how. The ability of a product to attract investors is woven around its performance, measured by return. It is well known that top performing funds attract significant amount of new inflows from eager investors. 

Mutual funds are run by investment managers and they showcase their performance. They choose a benchmark that represents a passive portfolio. They then measure themselves against the benchmark. If they do better, they generate an alpha, or excess return. They attribute the alpha investment management skills. But this is only half the story. 

Investors cannot seek absolute returns either. Years have been lost in the pressure of assured returns and it is still a struggle to get investors to see that there is no assurance in the real world. Many investors want to believe that a professional investment manager is one who can promise and deliver a specific rate of return. In the risky real world, that id impossible to deliver.

DIVIDE AND RULE : 

"You can keep all your egges in one basket, only till you have the control over that basket" - Elon Musk

So, the safest way is, 

"Never keep all your eggs in the same basket. " - Warren Buffet

This is the philosophy behind asset allocation. If you keep all your investments concentrated in a single asset class, the probability of your portfolio getting hit in tough times will be high. If you spread your across different baskets, it is very unlikely that all of them will be negatively impacted at the same time or for the same reason.

Different asset classes respond to an event in different way. If one asset in your portfolio is not performing well, another asset can cushion the blow. In a falling market situation, this could translate into reducing the possibility or extent of losses. For instance, in 2008, the year which saw a global financial crisis, equity returns stood at (-)15 %, while government securities earned a return of 28 %.

According to a study, right asset allocation contributes more than 91% of the portfolio performance over a long time. The factors that are often given more prominence, like selection of securities and market timing contributes less then 5% and 2%, respectively. 

Bringing asset allocation into practice is not that easy because investors are prone to emotional decision making. If you see the equity market going up, it is highly plausible that you would want to invest more in equities. There could also be an element of greed that could prevent you from diversifying your investment just because  you see your equity investment growing. Even if you convince yourself to follow the approach of buying when the market is low and existing when it is at the peak, the challenge remains as it is not easy to predict the peak or the bottom. The market movement is based on several international or domestic factors. Moreover selling of financial assets involves taxation and paper works. Hence, it is good idea to entrust the responsibility of asset allocation in your portfolio to experts. 

To facilitate investors with their asset allocation, the capital market allocator, the capital market regulator, Securities and Exchange Board, has allowed mutual funds to have a category of hybrid scheme, called as dynamic asset allocations or balanced advantage schemes. One of the best performing and largest funds in this category is the asset allocator fund.

In order to prevent their own emotions from driving the decisions, the fund managers rely on an in – house market valuation model. This model evaluates the market valuation on an on – going basis and indicates the call that should be taken. If the equity market valuation is high. It would suggest exposure to equity. If the equity market valuation goes down, it would encourage the fund managers to increase investment in equity. 

Investors should take advantage of such mutual fund scheme. This will not only ensure that they have a reasonable asset allocation at all times, but also, as a consequence, result in optimal risk – adjusted return.

Content credit – Sir. Sarvana S.