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When Less Means More

Complexity in the financial world is just smoke and mirrors erected by a priesthood

In an interview with Mint newspaper, Dhirendra Kumar, CEO, Value Research, indicates how to achieve personal finance goals in an ever-changing world.

How can you equate ‘living light’ with personal finance?

By doing less. Many investors make the mistake of doing too much to their investment portfolio. ‘Investing Light’ means sticking to some basic time-tested principles: It means investing in the minimum possible number of securities. It also means taking the fewest possible actions.

In the last couple of decades, the culture of investing (and of finance in general, and perhaps of all business) has shifted towards a worship of complexity for its own sake. More and more investors assume that any investment methodology that doesn’t involve mysterious formulae, arcane ratios and elaborate charts can’t possibly deliver the goods. The truth, perhaps, is exactly the opposite. The complexity is just smoke and mirrors erected by a priesthood in order to create a need for their services.

What then are the basics one should not lose sight of?

Here’s the recipe for the perfect financial plan. Keep all the money that you might possibly need for at least the next three-to-five years in safe fixed-income investment. Long-term investments should be allocated to a small number—three-to-four—of conservatively run equity funds with a good track record. Remember, the three-to-five-year time horizon is a sliding window. Money should be moved from equity to fixed income as its date of usage comes near. Investments in equity should be gradual—shoving money into equity-backed investments in one fell swoop when the markets get hot amounts to courting disaster, but I guess everyone would know that by now.

And then there’s insurance. Make a liberal estimate of how much money your family will need if you fail to wake up tomorrow morning and buy the cheapest term insurance you can find. Do diversify your insurance across LIC and two private insurers—one is no longer confident of who’s going to be solvent tomorrow. Buy lots of term insurance but don’t even think of buying any other product from an insurance company—the obfuscated expenses they charge will murder the real returns you’ll get.

How can you tailor your investment portfolio in response to the downturn?

If your investment plan needs tailoring to suit the season, then it’s useless to begin with. Almost by definition, the only useful approach to investing, and especially ‘Investing Light’, is one that does not need to change in reaction, or worse, in anticipation of events. The above approach to investment is just as good in April as it was in January or October 2008. And in 2007, 2006, 2005, 2004, 2003…you get the idea.

So ‘Investing Light’ means that one doesn’t need an expert.
No, except to tell you that you don’t need an expert! Seriously, no one should dabble in an investment that they don’t understand personally. It’s better to let a good investment pass by rather than put money in anything that you don’t understand. An expert’s role is not to tell you where to invest. It’s to show you how to decide that for yourself.