“Some people have large wealth, very low consumption requirements and very long-term financial requirements. Why can’t their entire portfolio be invested in equity?”
This was the question raised by my young and energetic advisory team member, Joystan.
And he was both right and wrong.
Having practiced financial planning and wealth management for more than two decades, I have seen the extraordinary power of equity to compound wealth over the long term.
I have also seen the short-term pain of stagnation, volatility and deep corrections.
A mutual fund or a stock is non-emotional.
But the person holding it is not.
A 30% fall does not bother a mutual fund. It doesn't lose sleep.
But the investor might.
He may become greedy during euphoria and invest more than he should.
Or panic during a correction and exit when he should have stayed invested.
And that is where the real problem lies.
Consider Mr Peter D'Souza.
Peter is 65, retired, has ₹10 crore of financial wealth, has no loans and nobody financially dependent on him.
His monthly requirement is just ₹50,000.
On paper, he has enormous risk capacity.
One could argue that he can afford to have a very high, even 100%, equity allocation.
But Peter has spent 65 years building his wealth.
And until today, he has invested only in fixed deposits.
He has never experienced market-linked volatility.
Now imagine that shortly after investing, his portfolio falls 30% in six months.
What happens then?
Will he remain invested?
Will he sleep peacefully?
Will he continue believing in the long-term strategy?
Or will he panic and exit?
Nobody knows.
Peter has the capacity to take risk, but he may not have the tolerance to experience that risk.
And that distinction is extremely important in financial planning.
The solution is not necessarily to avoid equity.
It may be to transition gradually, experience volatility, understand one's own behaviour and build equity exposure up to a level that the investor can actually live with.
There is no merit in increasing the dose when the patient cannot digest it.
The job of a fund manager or portfolio manager is to manage investments — markets, companies, economies, interest rates, inflation, global events and valuations.
The job of a financial planner/adviser goes beyond the portfolio.
It is also about managing the investor's financial behaviour and emotions.
Markets are difficult.
But human emotions can be even more difficult to manage.
We may all be blessed with the opportunity to create wealth.
Yet our biases, ego, overconfidence, fear and greed often determine how much of that opportunity we actually benefit from.
So, I finally told Joystan:
Some will become rich. Some will become richer. Some will not become as rich as they could have.
We cannot push people beyond what they can emotionally handle.
Our job is to educate, guide and help our clients make better financial decisions.
But don't overdo it.
If you have missed any of our previous articles, please visit
https://naveenrego.com/blog-grid.php?aW5pdGlhdGl2ZXNfdHlwZV9pZA=MQ
Happy Financial Planning!
Naveen Julian Rego – CFP®
MD & Principal Officer
Naveen Rego Capital
SEBI Registered Investment Adviser
Reg No: INA000019211
BSE Enlistment No: 2178
Disclaimers:
- Investment in the securities market is subject to market risks. Read all related documents before investing.
- Registration granted by SEBI, enlistment as IA with Exchange, and certification from National Institute of Securities Market (NISM) in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.
- Financial products recommended by us that are under the jurisdiction of other regulators are beyond the scope of SEBI’s grievance redressal mechanism.
