Last week (link), we had touched upon the importance of attaching a ‘WHY’ to our portfolios. This also forms the central thesis for what is called as GOAL BASED INVESTING.
But to be honest, a lot of us really don’t start with goals. In fact, we find it a little intimidating to think about our life goals. I completely get it.
All that we want is to invest whenever we have the money and gradually figure it out over time.
Also some of you may have already built a large corpus. This means all the usual goals (kids college, retirement etc) are taken care and goal based investing wouldn’t make much sense to you.
So here comes a simple alternative to GOAL BASED INVESTING…
The SMS Framework
Before you freak out, it is a simple approach which buckets your portfolio into three parts
- SLEEP WELL Portfolio
- MAIN Portfolio
- SHOOT FOR THE STARS Portfolio
1. SLEEP WELL Portfolio
As the name suggests this is the portion which is meant to let you sleep well throughout your investment journey.
This will include
- Emergency Fund: covering at least 1-2 years of bare minimal expenses
- Life Insurance
- Health Insurance
- Money needed in the next 5 years: I prefer High Credit Quality Debt Funds (100% AAA) with Low Interest Rate Risk (Modified Duration less than 3 years)
SAFETY and LIQUIDITY (read as ability to quickly take out the money whenever you need it) is the priority. There will be no compromise in these two factors in search of higher returns, and rather the compromise will always be on returns.
2. MAIN Portfolio
This is your actual portfolio where majority of your money will be invested.
The focus here will be on making decent returns over the long term and to live with some uncomfortable periods .
Managing and optimizing for REGRET (of not having more allocation in equities during a bull market and not having less allocation in bear markets) will remain the key focus.
We will be building and managing this portion via a framework called MARBLE framework
- Decide on Mix of Equity, Debt and Gold (also referred to by the boring name – Asset Allocation)
- Adjusting the mix based on Valuations (in extremes)
- Building Equity, Debt & Gold Portfolios
- Large Falls – “What if things go wrong” Plan
- E – Exit (how to exit portfolio as the money need arises) and Entry Strategy (how to deploy lumpsum)
I will be breaking down each of the steps in the coming weeks. Trust me, it’s not as complicated as it seems. So if something went slightly over your head, no worries, I got you covered!
3. SHOOT FOR THE STARS Portfolio
This is your shot at super high returns!
This portfolio will take the highest risk and will focus on maximizing returns.
‘Concentrated Exposures’ will be a key strategy in this portion.
There is a good chance that risk may play out and we may also end up with dismal returns over the long run.
So it is better to limit this portion to 5-15% of the overall portfolio.
ESOPS, Stocks, PE Funds, Bitcoin, Derivatives etc will form a part of this bucket.
Summing it up
It is preferable to keep these three portfolios separate, as the decision making rules we will use to build portfolios is very different for each of them.
In the next week, we will start building out the MAIN portfolio and dwell on the most important decision –
How to decide the Asset Allocation Mix?
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Till then, happy investing as always 🙂
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Disclaimer: All blog posts are my personal views and do not reflect the views of my organization. I do not provide any investment advisory service via this blog. No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments.