Most things in life are simple, till we decide to make them complicated. This is true of financial planning as well. In the last post I wrote about how you can crystallize all your goals into a single FI number and track it easily, which is so much better than juggling with 6-7 goals.
So now that you have that personal FI number what do you do next? Well you need to decide about which asset classes you should invest in. The most common asset classes are Debt, Equity, Commodities, Real estate, Gold etc. While an investor can definitely invest in all of these and more my feeling has always been that for most investors, debt and equity are sufficient for creation of an effective financial plan. Real estate is important to the extent that you must own your own house, at least by the time you retire or preferably much earlier. You may at best stretch it to a second home if you are comfortable in dealing with the logistics. However transactions in the Real estate are time consuming and cumbersome so it is best avoided unless you have specialized knowledge. In the same manner commodities are not for the average investor and gold should be looked at more for consumption than for investment.
I often get asked the question as to why we should not deal with only equity or only debt. Equity is a great asset class for the long term but you cannot depend on it at any particular point in time, be it long or short. The biggest risk in equity is that you may be forced to redeem it at the wrong time due to your need for meeting a goal and this can be grievously injurious to your financial health. A solid grounding in debt ensures that such risks are mitigated. Why not debt alone? For starters debt returns will never beat inflation on a consistent basis. This means that you will need to have a really large asset base in debt to take care of your future goals. For people who have it, this may be a possibility but that is really not true for most of us. I will go on to say that you should not go with a debt only approach even if you have a large asset base as growth in your portfolio can be best achieved through equity.
Now that we have got the asset classes sorted out, how many portfolios should you have. Many people decide to have a very sub-optimal strategy of mapping each goal to a specific portfolio. Now that we have only one main goal there is no need to do so. I think all investors should have 3 portfolios namely Debt, Mutual funds and stocks. As I have explained this in earlier posts I am not repeating my rationale here. You may want to search the blog and read the relevant posts.
So there you have it – your financial life from 2016 onward can be as simple as 1-2-3. One goal, two asset classes and three portfolios are all that you need to take care of your finances. In the next few posts I will write about how you should invest in the 3 portfolios for 2016 and beyond.