The given investment maxims have proven relevant most of the time, but they are not carved in stone. Investment strategies should be tailored to individual situations

I got the idea for this article from Abhishek Singh at DSP Mutual Fund. The fund manager of DSP Top 100 and DSP Equity and Bond, he recently shared some really interesting facts. The focus was on investment platitudes that we just take for granted. Here they go and the facts:

High Turnover Is Bad: But Peter Lynch had a turnover ratio of 300 per cent during the early years of managing Magellan Fund at Fidelity Investments.

Concentration Is Bad: But Charlie Munger had a 4-stock portfolio (Wells Fargo, Bank of America, Alibaba Group, U.S. Bancorp).

At the end of 2023, Berkshire Hathaway owned about 6 per cent of Apple, which amounted to about 40 per cent of the conglomerate’s total value. It was about four times bigger than Berkshire’s second-biggest public stock holding, Bank  of America.

Concentration Is Good: But diversified indices beat the performance of most of the active fund managers.

Never Sell Quality: But Walt Disney peaked at around $200 in early 2021. Currently, it is back at 2015 levels. The stock split history is not the reason.

Dividend king Coca-Cola has underperformed the average returns of the market over the past decade.

Value Always Wins: But Seth Klarman’s Baupost and Warren Buffett’s Berkshire Hathaway are just about even with the S&P 500 over the past two decades.

The Last Decade Belonged To Growth: But a vast majority of the best-performing funds in the decade were value-oriented offerings.

Mega Caps Will Never Fall Due To Flows: In 2022, the S&P 500 shed 19.4 per cent this year, marking a roughly $8 trillion decline in market cap. Drawdowns ranged from 40 per cent to 75 per cent.

Mid- And Small-Caps Always Outperform: The Russell 2000 index measures the performance of small-caps stocks while the S&P 500 index measures the stock performance of 500 large companies on the US stock market. And the S&P 500 has beaten the other index over a number of time periods.

We often believe these platitudes that are handed over to us and fail to look at the context in which they were stated. Along the same lines, a social media influencer posted an opinion on X, previously Twitter, that berated certain investments. According to him, the Employees’ Provident Fund (EPF) and the Public Provident Fund (PPF) were not “investments” but “tickets to losing your hard earned money”.

Let us examine his stance objectively. Between 1986 and 2000, the PPF return was 12 per cent per annum. It dropped to 9 per cent and then 7.6 per cent (2018), climbed up to 8 per cent, and is now at 7.1 per cent. To save for your retirement goals and your child’s education or marriage, you need to generate a better return on your investments. The PPF rate of 7.1 per cent, even though it is tax-free, is lower than what you will earn from equity.

So does that mean these are not “investments”? I don’t agree.

There is no good or bad investment. It all depends on what you are seeking from it and how it fits into your portfolio. Let’s say a couple opened their PPF account when they were each 30 years of age. Each contributed the maximum amount (Rs 1.5 lakh) every single year and extended it by 5 years when it matured. So just when they cross the age of 50, they would have a massive corpus, that would have compounded over the years, completely tax-free. This would also provide an excellent buffer to their all-equity portfolio, for which they were investing systematically every single month via systematic investment plans (SIPs).

But an employee, who has to mandatorily subscribe to the EPF, might decide to also make a very substantial contribution to the Voluntary Provident Fund (VPF). In such a case, she need not opt for the PPF, because the provident fund is offering her an assured return at 8.25 per cent per annum that is higher than the PPF rate.

The EPF, VPF, and PPF are long-term investments that instil a disciplined savings habit. But in one of the examples, the PPF is a good avenue, while in the other, it doesn’t really make sense.

The second aspect that the individual failed to address is the asset allocation.

Not every investment should be in equity. One needs a fixed income buffer to provide some stability to the portfolio. No matter how badly the stock market falls, the investor here is assured of a particular return.

During the pandemic, when the market dipped abysmally, I braced myself for a gut-wrenching dip in my portfolio. My portfolio then comprised fixed-return investments (a fixed deposit, EPF, PPF), debt mutual funds, and equity (stocks and mutual funds). At that time, there was no exposure to gold. I was pleasantly surprised to see the overall portfolio down by just 11.11 per cent, while the equity portion of my portfolio was down 25 per cent. If my entire portfolio was a pure equity play, the blow would have been harder. Yes, equity bounced back but we did not know it then. And the psychological impact of seeing it all collapse would have been tough.

Also, thanks to the asset allocation, I knew that if I needed money, I could sell my debt fund or close my bank fixed deposit. I wanted to leave the equity component untouched because pulling money out when the market is down is self-defeating. Asset allocation has the added advantage of putting boundaries in place that save us from extreme behaviour. It would prevent you from going all in during a bull run.

A Final Word Of Caution

To cope with the tremendous amount of information we encounter and to speed up the decision-making process, our brains rely on shortcuts to simplify things. If someone sounds confident, we tend to believe what they have to say. On social media, we tend to blindly swallow what an influencer with a huge following has to say.

While there might be some evidence of truth in what they are conveying, applying it hastily to your portfolio could mean destruction.

Nothing is written in stone. You cannot view all investments through a black and white lens. Some believe that trading is bad, but it is a full-time occupation for many. Some believe that it is ridiculous to invest in thematic or sector funds, but I have made money in a pharma fund.

In investing, everything must be contextualised and adapted to the individual situation. For an individual barely making ends meet, and just managing to invest a few thousand every month, taking a tactical bet would be foolhardy. But for another with a portfolio of a few crores who already invests in the broad market, taking a reasonable tactical bet on a sector, or theme could be a smart choice.

An investing style outperforms in specific markets and underperforms in others. Ditto with specific market caps and asset classes. Nothing works all the time. So don’t throw the baby out with the bathwater.

By Larissa Fernand, Behavioural Finance Expert