Have you implemented this Investment Strategy???

Steve Jobs & Bill Gates attributed their success to one single factor, by & large – Focus.

If we think about it,

Isn’t it the trait that we struggle to attain?

When is the last time we pursued a task with a fierce focus without a single element of distraction?

We know that it quite a hard ask-:)

Let’s try to draw a parallel between this precious behavior and financial advisory.

In this profession, it not just enough that you, as an advisor remains focused on your deliverables; you got to get your clients also focused. Question is, if this is behavior is so hard to come by on a natural level, how on earth would it possible for you to get your clients do it?

The natural answer is tying the investments to financial goals & therefore gets them on to the long term track record for achieving financial goals than getting to worry about the market fluctuations.

So, here comes the next question. On a realistic level, what percentage of investors would be on Goal-Based Investments? Even if we exclude the DIY segment, our hypothesis is that Goal-Based Investments would still be a minority.

Hence, if we couple these 2 issues – That is, not having an objective to the investments & lack of focus as a common absurd behavior, the Writing is on the Wall. Investors will get distracted and probability of making mistakes would be far higher.

How do we solve this problem? The problem of lack of objectivity & focus.

Solution is Life Cycle Investing

Before we get to what Life Cycle Investing is, let’s take a quick look at how an Investor Experience would typically be in the current landscape.

An investor who engages a Robo or a Human Advisor and who is not doing any goal planning is normally put under the `General Investing’ category. Under this category, generally there is no specific mandate or review that the Investor would be adhering to. When there is no mandate, there is no objectivity & focus.

How does Life Cycle Investing bring Objectivity & Focus?

The classic approach to life cycle investing consists of starting with comparatively high risk-high return strategy, and gradually moves towards low risk-low return over the years. For the sake of such investment, the whole life cycle can be divided into three main phases:

1. Accumulation phase: Investors in the early to middle stages of their careers come under this phase. In this, due to their typically long term investment horizon and future earning ability, they can invest aggressively in equities and get high returns over the investment horizon in form of equity risk premium.

2. Consolidation phase: Investors in the mid-point of their career come under this phase. In this, due to relatively short investment horizon in comparison to accumulation phase and increased social responsibilities, they want the preservation of their capital with moderate returns.

3. Distribution phase: This phase typically begins at the time of retirement. In this, people reap the fruits of their life-long retirement planning by withdrawing the money for their post-retirement expenditure.

The investment strategy selection of the Advisor depends upon the phase in which his client is currently.

Commoditized Funds

There are schemes being run by some mutual fund houses like ICICI Mutual Fund, Franklin Templeton, Aditya Birla Sun Life, and IDFC where the investors can put their money based upon their risk appetite and age profile. But, these are not life cycle funds in true sense. These are mostly fund of funds schemes in which the funds invest the investors’ money in their own different schemes with matching the risk-return profile. However, these schemes do not have the provision of automatically changing the asset class weights with changing age profile of the investors. The only investment vehicle which would come closer is New Pension Scheme (NPS). In this, the investors can choose among three asset classes: E, G, and C based upon their risk appetite and age profile

Our Recommendation

Do not leave the Life Cycle Management to Manufacturers. Have an Asset Allocation & Re-Balancing Strategy based on the Life –Stages as explained above. Any investor who is not Goal Based should be put under Life Cycle Investing & is to be communicated about the Strategy & Process. It would not only bring objectivity to the Portfolio, but would also evoke great curiosity amid Investors to move to Goal-Based Investments – An idealistic way of Investment Management.

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