Cookie-jar approach to investing

We have mentioned this before: Your risk attitude is not a stable personality trait. This has major implications on how you design investment portfolios. It means risk attitude is not the same for each life goal you pursue. You may be risk-averse when it relates to some goals and risk-seeking toward others. The upshot? You may have to create a separate investment portfolio for each goal. Here is a simple process to integrate varying risk attitude with your investment objectives.

Goal-based portfolios

You earmark each jar in your kitchen to hold a specific cooking ingredient. Now, picture that jar holding, instead, investment portfolio. You can label it as, say, ‘retirement portfolio’ and ‘child’s education portfolio’. You may require one portfolio for each goal because risk attitude may be different for each goal. For instance, you are likely to take more conservative investment decisions relating to your child’s education portfolio compared with retirement portfolio. Note, this is true even if two goals have the same time horizon. It is primarily for this reason you need a cookie-jar approach to investing — earmarking a portfolio for each goal.

To ensure that the process is not overwhelming, you can choose to invest in only two asset classes, equity and bonds and one investment product for each asset class. For instance, you can pick bank recurring deposit for bond investments, where the deposit’s tenure matches with the time horizon for life goal.

Equity investment can be in an ETF (passive product) to moderate future regret. What if you picked many active funds and one you did not choose perform better than the ones you invested in?

Conclusion

At first glance, having a portfolio for each life goal seems overwhelming. But, it need not be if you set up an automated investment process.

Here is how you can do that: First decide on the amount you want to save each month towards your goals. Transfer that amount to a separate savings account. Then, set up systematic investment plans (SIPs) from that account. You should set up two SIPs for each goal — one for equity and one for bonds.

Setting up a separate account will be operationally efficient when you rebalance portfolios. This is important to manage each goal-based portfolio’s equity risk, especially when you are closer to the end of the time horizon for a life goal.

(The author offers training programmes for individuals to manage their personal investments)