The effort of doing nothing

Doing nothing seems impossible in a market that reacts to every bit of news. Nevertheless, it should be a core strategy. And it requires a great deal of discipline and mental toughness.
By Guest |  14-02-19 | 
 

The year 2019 was ushered in on the back of Brexit, rising oil prices, a global economic slowdown and trade wars. This year has it’s fresh set of ‘panic buttons’. The General Election, mishaps around debt funds being some of them.

Amidst this volatility and uncertainty, Srikanth Bhagavat, Managing Director and Principal Advisor at HexagonWealth believes that investors need to get rid of some misconceptions.

Below are his thoughts on the complexity of portfolio turnover.

Every investment decision has an implicit or explicit cost attached. Getting a grasp of them and evaluating them would enable you to act more smartly.

Here are 6 points to keep in mind before you act on your portfolio.

1. Exit load

Premature exit from a fund attracts an exit load. This is the fee charged from an investor for exiting or leaving a scheme. This is to act as a deterrent to investors from pulling out investments in mutual funds prematurely. If you adviser suggests exiting a fund, ask for an evaluation of the pros and cons of incurring the exit load. This will help you clearly quantify the possible outcome.

(This may not be relevant to most, but it is a point I would like to make. If you buy/sell equity directly or buy a mutual fund through your demat account, take into account the costs on every transaction. There is brokerage, Securities Transaction Tax (STT), service tax and stamp duty; be it a full-service brokerage or a discount broker.)

2. Taxes

Whatever be the asset class – equity, debt, real estate or bullion, there are taxes to be paid. Depending on the tenure the asset was held for, it would be either short-term capital gain or long-term capital gain. Do note, the tenure will differ between assets too. It would range from 10% on long-term equity to 30% on short-term debt. Indeed, taxes are a huge drag on returns.

3. Reinvestment risk

Reinvestment risk is the risk the investor will not obtain the current cash flow (via interest payment) or the current rate of return. He will have to reinvest the money from the sale of his investment at a rate equal to the investment’s current rate of return.

Before selling, ask yourself (or your adviser) these questions:

a) Where do you plan to re-invest the proceeds?

b) Will target returns be met?

c) Is achieving target return now more difficult and is it contingent on timing re-entry into the asset?

 4. Being right

 This is a subjective issue and depends on the perception of the adviser. It requires one to have a clinical view of the decision at hand and bear in mind that it could go either way – work out well or be a bad call. If the adviser is correct on the decision to exit, it saves money for the investor. (Revisit Reinvestment Risk) If the adviser has erred in his judgement, what are the implications and how much time would be needed to recover from that? With every wrong step, returns diminish, with steep long-term consequences.

 5. Trusting your adviser

Investors need to ignore their predisposition towards action, when it comes to their portfolios. Subsequently, they need to trust their financial adviser. The financial adviser is, both, an asset allocator and active manager. The term ‘active’ does not mean that a transaction must take place in reaction to every dramatic news headline. If the adviser is suggesting that one stays put, trust his judgement. If you don’t, you could burn a lot of wealth unnecessarily. The wisdom of staying put will only be evident in hindsight, after a lapse of time.

6. It is never about today

Most financial news is about today. And the consequent impact on the investor is that he believes he must act instantly. Today isn't that important. What is important is not reacting to the news and staying put with your investments. To do that, revisit your goals. Discuss them with your adviser. Trust the rigour of the adviser’s situation analysis, outcome scenarios and conviction.

You may think that your adviser is too complacent by not reacting to today’s news. But remember, he has your best interests in mind.

Advisers, on the other hand, must also display the ability to convince investors not to sell. And that, probably requires a lot more effort than the investment analysis.

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