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!!!

Using debt to grow rich

cash flow, Debt, Liabilities, possibility thinking

I had written two posts a few days back on the difference between debt and liability.

As a middle class person, the word debt has a lot of negative ideas. I have had so much credit card debt , housing loans etc. that the very idea of taking a loan or using a credit card is an absolute no-no.

Garrett Gunderson gave a very good explanation of debt versus liability which I explained in the posts earlier. I also wrote in those posts how I am trying to get my head around the ideas of utilising loans – loosely called debt to grow. I did understand the concept that if you are buying a productive asset, to buy that asset you will incur a liability. As long as your assets are more than your liabilities, its not debt. If you invest in productive assets and those assets generate cash to take care of the liability then there’s absolutely no problem.

I came across one video of Robert Kiyosaki – of Rich Dad Poor Dad fame – where he talks about how the rich actually love debt. But he makes a very clear distinction. They have teams who understand and manage the debt such that they are consistently extracting the maximum out of the asset to produce cash and pay off the debt.

This way they are able to grow their assets much faster. They then use the assets to generate more cash, pay of the liabilities / debt and start the cycle all over again. Since they now also have the asset, they are also able to use that asset as collateral to get more loans to expand further. If the assets are non-depreciating like real estate or intellectual property then its even better. What this gives the rich people is leverage to grow faster. it allows possibility thinking. Therefore the rich are growing richer.

This is something which I need to think of, because my middle class mindset is still a little sceptical. Robert also has a caveat to this theory. He is clear that its not ok for everyone to use debt because its a double edged sword. If you don’t have the guts to handle this kind of a double edged sword, then you should avoid debt at all costs.

Tell me your views on the topic in the comments section below. I will look forward to hearing from you.

Till next time then.

Carpe Diem!!!

Buying confidence with insurance

confidence, Fear, Insurance, Leverage, Risks

FEAR is generally caused by the unknown. What you are not sure off causes you to be uncertain. When you are uncertain you get fearful about the outcome.

Earlier I always used to talk about how investments would lead you to have the confidence to take the risks of life without being fearful .

However I have recently started analysing different kinds of risks that I face – so as we grow older, medical costs is a big issue. Next I have only one house in which I presently live – so there’s always the risk of a catastrophe that can hit.

I actually listed at least 5 or 6 different things which are high risks, that can suddenly wipe out my savings and investments.

Based on the ideas given by Garrett Gunderson, in his book Killing Sacred Cows, I have gone about figuring out if there’s insurance available to me to cover each of those risks.

While I knew about health insurance, I didn’t know about the concept of top-up that can add a quantum leap in your coverage at a very small premium. The caveat is that you should have the base medical insurance in place. Since I identified the risk and put a value to it, I was able to identify a product which would give me coverage to that risk.

Once you can list out all your risks and start putting a monetary value to them, chances are that you may also get a company who will be willing to cover the risk for you at a price. Once you have covered the monetary value of the possible risk, then its no longer a risk.

Insurance is a different kind of leverage, you are covering a large monetary risk by paying a small premium.

Once there is no risk, the fear reduces. Once fear reduces, you get the confidence to look at bigger things and aim for them. Insurance helps you get that confidence.

Till next time then.

Carpe Diem!!!

Velocity of cash

cash flow, Financial Independence

Many years back I had read one book by Prof Ram Charan- Every Business is a Growth Business. Prof Ram Charan is one of the most well known gurus of multi billion dollar CEOs. I have mentioned his books earlier also.

In this book, that I mention above, he tells a story about how a lady in India , who is selling some items on the road and has a simple logic – she wants to sell of all the items that she has got to vend that day, even if she has to give a little discount for a larger quantity because then she can turn the cash around.

In business the equivalent logic is that profit and loss is on the balance sheet for record purposes, what matters is the ability for you to cycle the cash. If you can turn more cycles on your working capital you can generate much higher profits. Cash is real. Profits are only for the books. Companies close because they are not generating cash, not because they are not generating profit. A lot of people in business even now don’t understand the value of cash and hunt for Gross Margins. Gross Margins are important when you are giving a lot of credit because then if you are not even making margins then your business will crash.

Something which I am trying to wrap my arms around is that Cashflow is more important than Networth. I have been a big proponent for the magic of compounding and how it creates magic , the longer you let the money compound.

I have recently been reading a lot of books written by Garrett Gunderson and also following his YouTube channel. His emphasis is that Networth is like a P&L statement which has little significance if cash is not getting generated. His view is that assets which don’t generate regular cash are worthless. As per him the fundamental issue for generating financial independence is cash flow not net worth. I am always looking for ways that can help me figure out a quicker way to financial independence.

As per him like in a company if there’s a machinery and it’s generating products that generate cash for the company then this asset has value. A building which is lying vacant and not generating cash just sits on the balance sheet without creating any value. The value of the land on which the building is sitting may appreciate over time. But the cash which the machine is generating can keep multiplying depending on the velocity that it can generate.

So if I am making 10% margin on every $100 of product sold and I am able to cycle that cash 12 times in a year, then at the end of the year I would have made $120 dollars (a 120% return) while the $ that I invested in building the product are still with me. On the other hand the land lying idle will appreciate maybe 5-10% per annum.

While the above concept is clear to me, what I am trying to get a handle on, is that, for an individual oter than giving property on rent, what other methods exist to get the assets to create cash flow.

If you’ll have got personal assets other than property which is generating cash, I would like to hear from you. Pls put in the comments below

Till next time then.

Carpe Diem!!!