Asset Allocation – concentration within an asset class

Abundance, compounding, Financial Independence

Today I am writing on financial advice after quite a long time. I have written multiple times earlier also about how asset allocation is important to buffer you against shocks in one asset class. Especially when you look at it, when you are in a debt instrument like a Fixed Deposit or Term Deposit with a bank then the amount promised (or interest rate promised) is almost guaranteed.

On the other hand prices of stocks and commodities keep going in cycles and real estate also moves in cycles. As they move in cycles they also have a tendency to go down multiple tens of percentages during down markets. On the other hand they also spike up multiple tens of percentages and can over many years give a massive inflation adjusted return.

But keeping your portfolio balanced between different types of assets is critical because being concentrated in one asset class can totally destroy your wealth.

Today however I will talk about why it’s important to concentrate your allocation within an asset class.

As Garrett Gunderson says, being diversified means lack of knowledge / conviction. If you are not confident of the items within an asset class on which you are confident of growth then its better to invest in ETFs or mutual funds for that asset class. These are designed to generally be diversified so that the individual risk is avoided an average return can be delivered. These are however also at risk of market fluctuation.

On the other hand if you see when the news reports talk about a market being at a high or low, they always talk of a certain “bucket” of stocks. Which means it is the average of all the stocks in that bucket.The Nifty or Sensex or the S&P 500 are all examples of buckets in different markets . These buckets are also called index.

As in any average there are things which are way above the average number as well as way below. If you have invested in the stocks which are way above the average, then you can make returns which could even be more than 10 times the index over a period of time.

However the amount your portfolio can grow is determined by the quantity of these “peaking” stocks that you have in your portfolio. If these are only say 1% of your portfolio then even the growth of the 1% by leaps and bounds will not be helpful if the remaining 99% is not growing. If you want to get compounding to work for you, to help you create abundance, then the stocks that you have should be the ones that have the ability to grow faster

I learnt this lesson when I was reading the Motilal Oswal Wealth Creation studies and its a critical aspect for your investing, of you are doing it on your own. If you don’t have the conviction or heart to do this kind of work to build your portfolio then its better that you focus on mutual funds and / or ETFs.

Till next time then.

Carpe Diem!!!

Habits – Path Dependence

Brain size, creativity, Energy, Habits, Human Brain, Uncategorized

I have generally been talking about how the human brain eats 25% of the energy that a body needs even though it is only 2% of the body mass. This is one of the reasons for procrastination in my opinion because the brain wants to conserve energy and by delaying the process of using the brain it’s able to save energy.

Since motivation is something which is fickle, you would rather convert something into a habit, so that it gets done automatically with a predetermined set of steps – something which B.J.Fogg explains very well in his book Tiny Habits.

Now the challenge with habits is that once formed, they are difficult to dislodge. So you become – literally a creature of habit. The human brain loves habits because they run on auto pilot, and don’t consume too much of energy. Since one of the key functions of the brain is to ensure your survival, the brain loves everything that does not consume energy so that it has enough when it has to figure out ways to survive.

With habits though you always follow a predetermined “path”.

However with changing situations in all our lives, you need to find ways to move away from the so called “beaten path” What made you successful then, will not make you successful in the future. Nokia realised it too late, Kodak realised it too late and there are a whole lot of other names that you can list. All these companies had put up terrific systems (equivalent of habits) to ensure economies, to ensure quality etc.

But the same systems got them blindsided.

Companies are also made up of people and when companies get blind sided, its the people who have actually got blindsided because they have become creatures of habit. To solve a new problem they use the same old tools, the same old sources of data which they have used earlier. But since the problem is new, the old tools don’t work and we are not willing to go back to first principles to solve the problem. Sometimes it pressure of time, sometimes revenue takes precedence and there are a whole lot of other reasons.

So the key thing to figure out is when to use creativity and when to go with something which has already proven useful many times before. When do you travel on the well tread path or choose a different road when you hit a fork.

As team leaders this is a problem which we face all the time and finding better ways to solve a problem is something that I am continuously looking out for. If you have found a way which helped you to creatively solve a problem pls let me know below in the comments.

Till next time then.

Carpe Diem!!!

Lazy weekend – nothing worth writing

Rest

Today I actually don’t have anything to write. It happens sometime to me when I have not focussed on anything in particular during the day.

This weekend I had taken a long weekend holiday and I just tried to give my body some rest. I have been working for too long without a break. These last 3 days I didn’t look at my official email. Luckily my office folks also didn’t give me a call. What that meant was that whenever I got an opportunity, I decided to take a break and took a nap.

Sometimes its good to just go blank. As a matter of fact Dan Sullivan talks that all entrepreneurs should divide their time into 3 zones and plan these well in advance. One of those 3 is time to recover by taking a break at regular intervals. One of the reasons that I want to become an independent entrepreneur is so that I can get a control over my time….at least I hope I will be able to.

When you do nothing, you give your brain some time to solve some problems in the background which it does not get an opportunity to do when we are constantly getting interrupted with the next urgent thing. This is what causes fatigue which in my opinion is a more brain related thing rather than a physical thing.

Anyway to cut the long story short……I didn’t have to tell anything today…..tomorrow I will hopefully put out a more sensible piece of content.

Till next time then.

Carpe Diem!!!

Scarcity or Abundance

Abundance, mindset

If you look at the news channels everyday more often than not you will see things that are wrong , with our world.

On the other hand if you see poor illiterate farmers are using cell phones in India and various parts of Africa. I was surprised to see a demo of how a fertilizer company has given a Voice BoT as part of their mobile application and farmers use it in their language.

Earlier when I used to go to get my haircut done at the salon, after the cut the barber would hold a mirror at the back of my head. Since there were mirrors in the front also, I would see the reflection of the reflection of the rear mirror. Now after the pandemic I have avoided going to the salons because there’s a lot of people. I use a local utility App and they send me a barber at home.

This utility app connects me to the barber because he’s also using a smart phone. After my haircut this barber now takes the photos of how he has cut my hair and shows me. I can zoom into the photo and get the finer details of my cut which I could not get before in the salon. Some people are looking at creative uses of what they (the smartphone) instead of thinking of what they don’t have (the large mirrors of a salon)

Another example of how semi literate people are using the smart phone to cut the time in decision making for closing an order. I was getting a chest of drawers being made. To close the laminate to be put, my carpenter didn’t bring me samples to approve before fixing it in his factory. Instead he saved time and money ( 1 hour in traveling each side and then the time to show me the various options) . He just sent me the photos of all the options he thought would look good and then asked us to choose. Zero cost.

There was a time less than a few years back when we used to spend about a dollar a minute to call North America from India. Today we do video calls virtually free. So much abundance.

The news papers and television channels would make you think the world is coming to an end, because they run a business. They need a higher viewership so that they get advertising revenues.

However if you look at the world around you, you will see so many good things happening. Become inquisitive about them.

Till next time keep an abundance mindset.

Carpe Diem!!!