For most equity investors, their asset allocation shouldn't get outweighed by attention allocation…
19-Apr-2011 •Dhirendra Kumar
Shouldn’t the asset allocation pattern of your investments guide its attention allocation pattern? As a reader of this newspaper, you may know about asset allocation, but ‘attention allocation’ must be new to you, at least in connection of investment. Let me explain. Your asset allocation is of course the proportion of money that you might have in different types of investments like stocks, fixed deposits, gold, real estate, PF etcetera; but your attention allocation pattern is the amount of thinking and worrying you do about each. As far as I have observed, for a good majority of Indians, equity (both stocks and equity-based mutual funds) gets an under-sized asset allocation and an over-sized attention allocation.
A typical case is that of an investor who recently wrote in to the ‘Ask Value Research’ feature on ValueResearchOnline.com. His assets include about Rs 2 lakh in equity mutual funds, about Rs 50 lakh in fixed deposits, and well above a crore in real estate. However, the worries he recounted and the advice he was seeking was entirely centred on the equity funds, which added up to a grand total of roughly 1 per cent of his net worth. Whatever optimisation he could possibly do to his equity exposure wouldn’t add up to anything significant—he could switch from the very best funds to the very worst (or vice-versa) and it wouldn’t have a noticeable effect on his net worth.
You might think that this is an extreme example but in my experience, that’s not the case. Most Indians who have any equity exposure are doing something similar. If you do an audit of your own asset allocation and attention allocation, you’ll probably find the same pattern of worrying too much about too little.
To some extent, this is understandable. Equity investing lends itself to more activity. Fundamentally, what drives this attitude is a continuous flow of information and continuous liquidity. On any given morning, you could—in theory—come upon a piece of information that could drive you to sell any stock or mutual fund holding, and in most cases you could be done and over with the transaction by the end of the day. And if anything drives you to do so, then you could switch your money to another, supposedly better fund just as quickly.
Obviously, nothing remotely resembling this level of hyperactivity is possible with real estate or fixed deposits. Not just actual activity but the information flow itself is minuscule compared to equities. However, just because the activity is possible doesn’t mean that it is justifiable if its possible impact on your net worth is not significant.
In reality, what most of us should be doing about this mismatch between assets and attention is to critically examine the asset allocation rather than assuming that it’s the attention level that needs to be fixed. Most people in our country are severely under-invested in equities. We all know that over the long-term, equity investing is a great defence against inflation and the only easily accessible way to participate in the general growth of the economy. You don’t have to become a great expert to do so—a couple of large-cap equity fund (could be index funds) are quite enough However, the problem is that for equities to make any meaningful difference to your life, they must be present in some reasonable minimum amount. The workload in managing an equity investment is higher, but it doesn’t scale up linearly with the money you invest, especially in funds. What this means is that if you make the effort to identify two or three good funds to invest in, you’ll be wasting the effort if you invest a sum that is too small to make a difference.
It’s difficult to generalise, but I’d say that equity investments of anything under 5 per cent of your net worth acquired without a plan might be good entertainment, but they are not an investment.