Fix your attention allocation

We have a great cover story for 'Mutual Fund Insight' October 2022 issue - great and useful. It takes the concept of asset allocation, which is often made very complicated by advisors, and shows you a simple approach to it. Asset allocation and asset rebalancing are a must, but if they are too complicated, you simply won't do them. That's the reality.

However, I'm going to talk about something else on this page: attention allocation. As a reader of this 'Mutual Fund insight' magazine, you would definitely know about asset allocation, but 'attention allocation' may be new to you. 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, etc., 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 undersized asset allocation and an oversized attention allocation.

A typical case is an old acquaintance who will be retiring in a few years and came to me for financial advice. He was completely focused on choosing and optimising the equity funds that he was invested in. And yet, when I quizzed him closely, it turned out that some three-fourth of his investment portfolio, amounting to well over a crore of rupees, was in fixed income, spread between PF and various fixed deposits. And I'm counting only financial assets for the moment, ignoring the apartment he owns. 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 huge 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. Are you too?

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 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 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.

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.