Tuesday, March 27, 2018

Asset Allocation: how to..

Gyan on Treadmill dated 27-Mar-2018

Today while on Treadmill in the gym, I was listening to 'Google Talks', The specific talk was an Interview with J L Collins, who runs a blog jlcollinsnh


Collins is the author of the book Simple Path to Wealth

Collins is a great fan of Index Investing. As per him, holding a portfolio of Stock Index and Bond Index funds is sufficient for a retail investor to build serious wealth in the long term. At the start of the interview, he is asked how much wealth should one accumulate for a comfortable living. He uses what is known as '4 percent rule'. As per this, the amount of wealth should be such that 4% of it can meet the annual expenses. So for example, if your annual expenses is 15 Lakhs, (One Lakh = 100,000) the amount of wealth you should have is 15 * 25 = 3.75 Crore (1 Crore = 100 Lakhs). 

How do you build this level of wealth?

Collins is a great fan of index investing. They are easy, they are less glamorous (and hence less risky) and they are intuitive. You are betting on the market which has invariably risen over the long term. As a practical approach to asset allocation, Collins suggests a combination of Stock Index Funds and Bond Index Funds in a specific proportion of your choosing. As the stocks fall and the bond proportion goes higher than normal, the recommendation is to sell bonds and buy stocks. This will ensure that you buy stocks on the fall. Conversely, if the stock rises and has a higher proportion than planned, one should sell stocks (book profits) and move into bonds. This is a 'retirement proof' strategy.

What is the advice for young professionals?

Every individual passes thru two stages when it comes to wealth. One is the 'accumulation' stage, when you are working, investing and accumulating wealth. In this stage, invest in equity.  Consider a fall in market as a 'fire sale' of good quality stocks rather than a fearful event. Put more money in the market when it falls since markets invariably reverse course. 

In the 'Consumption' stage, use the asset allocation process mentioned above.

Collins is not a fan of owning a house. He feels that own house is a liability rather than an asset. Buying a house is a 'lifestyle' decision rather than an investment decision. The problem is that people confuse between the two and make terrible choices.

Nice interview. Worth a listen.

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