A Global Collapse Need Not Shatter Your Investments

Sep 12, 2022
Author: Ajit Dayal

The news looks bleak, the commentary is bleaker. Just as the world is recovering from a severe bout of Covid, the world is now rattled by the twin impact of:

  • The excessive dosage of money that fed into the global economy to keep people and businesses alive, and

  • Russia's invasion of Ukraine which has led to an energy war and a shortage of supplies of essential food and cooking oil.

We are confronted by two realities:

  1. The prices of everything we consume has increased - and is likely to increase further,

  2. We are unsure about what the future will hold. Our neighbours Sri Lanka and Pakistan are in a crisis while China continues to stumble ahead, and everyone is wary of what will happen to the global financial and economic landscape if this giant were to fall.

Rising prices, or inflation, are caused by many things but there are two main reasons:

  • When the things we want - or demand - is more than what is available (the supply). After having been locked down for two years many of us are desperate to go out and meet friends, travel, and shop. This has been referred to as 'binge consumption.'

  • Sometimes supply may exist to match the increase in demand - but there may be a time lag for that product or service to reach the person demanding it. This may be so because the supply sits in one geography and the demand originates in another country. So, if I want a new TV but the TV set is sitting in a factory in China ready to ship to India but stuck in China due to a shortage of shipping vessels or loading staff, then that TV in China is of no use to me. I will then be willing to pay more - or be asked by the dealer to pay more - for the TV sitting on the shelf in the store near my place.

Covid has been a disrupter to normal assessments of demand and supply, to the smooth linkages and supply chains that traversed the global freight systems, and to how governments collect money and spend it. Balance sheets of every meaningful government in the world are stretched: they had to spend money on healthcare and deployment of covid vaccines, send money to people locked in at home, dole out money to businesses to keep them alive - and live with the reality of having lower tax collections because their economies had a lower level of economic activity. If governments were a typical household, they would be bankrupt. But governments can print money - which they did - and escape bankruptcy.

Borrowing money never solves a problem - it gives you more time to find a solution to earn money to repay the loan you took. Well, if the world heads into a lower level of economic activity, then governments will have to borrow more - as opposed to paying back the loans they took during Covid.

And that will kill financial markets: interest rates will increase, people will consume less, companies will not expand due to slower consumption, jobs could be lost, people will consume less, companies will not expand due to slower consumption, jobs could be lost, people will consume less...you get the picture. We will be in a downward spiral of economic activity.

And stock markets could collapse to significantly lower levels: some expect a decline of anywhere from 20% to 30% lower than today.

Taking shelter from the storm

Every sailor knows that a ship must be seaworthy to protect against a storm. Furthermore, when the storm approaches, the crew should prepare the ship to face the deluge and keep enough energy, food, and water to survive the storm. Storms at sea don't last forever. They may last for a few hours or a few days. A financial storm, on the other hand, can have an impact on our lives for years or even decades.

Investors in mutual funds can use mutual funds to their advantage and prepare for the storm.

The basic tenets of buildings a storm-resistant investment portfolio are:

  1. There must be diversification across asset classes (see 12 20 80; baara; bees aur assi below but the base case suggested allocation is 12 months of your expenses in the safe liquid fund and then the balance is 80% in equity mutual funds and 20% in gold; and you can modify this to levels that make you feel comfortable);

  2. Investors must own various kinds of equity mutual funds - investors must invest in a diverse range of investment styles: small cap, mid cap, large cap, blue chip, growth, value, ESG, etc. And though these funds can all be from the same fund house - with different fund managers managing each of these styles. No fund manager should fool you: each of these equity 'styles' needs a different mindset and skill set. A long-term value investor cannot be expected to do satta in small-cap momentum and produce consistent performance over longer periods of time;

  3. Having 100 equity mutual funds in your portfolio sounds intuitively silly. It is like having a boat with many windows: chances are that in a storm some will break and require all your attention. Having 1 to 3 sounds risky. Maybe the answer is somewhere in the 8 to 12 range?

Selecting your basket of mutual funds

A sensible and thoughtful investor who recognises that they should NOT invest in one style of investing, in one approach, in one asset class, and who recognises the need to allocate your savings across a few asset classes to build long-term wealth has already won half the battle of long term investing. The trick now is to figure out which of the thousands of mutual funds out there will work for you!

PersonalFN has guides and research reports that can help you select the best / safest liquid funds, equity mutual funds, and gold funds. (click here to see their mutual fund research)

Alternatively, QuantumAMC has built an easy-to-use calculator which has a base suggestion of 12 20 80, namely: (a) 12 months of expenses kept aside in safe, liquid, and lower return Quantum Liquid Fund; (b) keeping this money aside you have a residual pool of money; from this 80% of the balance in a bouquet of equity funds, and (c) 20% of the balance could be invested in the Quantum Gold Savings Fund. The elegance of the solution is that you can change the mix with a few keystrokes to suit your level of comfort. For those investors who prefer the 'passive style' of investing and believe in the index-hugging, low-cost solution (rather than the claimed brilliance of fund managers who select stocks and build 'active-style' portfolios, QuantumAMC's Passive option is a click away. Enjoy the freedom to choose your path forward by using the easy-to-use calculator 12 20 80 (baaraa, bees, aur assi).

Table 1: Passively managed and factor-based equity funds cost 60% less than Actively managed equity funds

Asset class allocation illustrations as per QMF 12 20 80 % Weight in an Actively Managed Portfolio Expense Ratio % Weight in a Passively Managed Portfolio Expense Ratio
Liquid Fund, safe money 12 months 0.16% 12 months 0.16%
Gold, after Liquid Fund 20% 0.06% 20% 0.06%
Equity, after Liquid Fund 80% 0.72% 80% 0.27%
Of which Equity Fund of Fund 75% 0.51% 0% -
Of which Value Fund 15% 1.29% 0% -
Of which India ESG Fund 15% 0.94% 15% 0.94%
Of which Nifty Fund of Funds 0% - 65% 0.20%
(Source: www.QuantumAMC.com)

Despite my bias for value investing - a style that was taught to me by the late Tom Hansberger, the co-founder of Templeton, Galbraith, and Hansberger, I have diversified my own investments in the Quantum Mutual Fund complex. This approximates my holding and planned investments as of July 2022.

Table 2: Baaraa, bees, assi (12 20 80) - and my asli allocation as of July 2022

Asset class, QMF Base Suggestion Ajit Comment
Liquid Fund, safe money 12 months 21 months Partial Switch to Q Nifty ETF FoF
Gold, after Liquid Fund 20% 25%
Equity, after Liquid Fund 80% 75% I have the Multi Asset Fund that has some equity exposure
Of which Equity Fund of Fund 75% 25%
Of which Value Fund 15% 44% I have a 'Value bias'
Of which India ESG Fund 15% 30% I have a 'Values' bias
Of which Q Nifty ETF FoF Pending allotment
Other: Multi Asset Fund 0% 5% Alternative to an FD

If subscribing to PersonalFN's mutual fund research and Doing-It-Yourself (DIY) sounds too complicated for you as you may not have the time, the Quantum AMC 12-20-80 baaraa-bees-assi is easy and can be tailor-made to your specific needs.

In summary, stay vigilant and be prepared: chances are that the world economy will see some shocks over the next few months and this will have an impact on your investment portfolio. Review the portfolio now and rebalance it.

Be Thoughtful and Deliberate. Embark on your journey of protecting your capital and enhancing your wealth with the powerful tool of 12 20 80 (baaraa, bees, aur assi) or the research services of PersonalFN. And tell me what you think about it...

Ajit Dayal is the Founder of the Quantum Group which includes Quantum Mutual Fund and PersonalFn. Ajit has over 35 years of research and investment experience. An avid writer and speaker, Ajit has been profiled and interviewed by many international and local newspapers, magazines, TV channels and radio shows and is never shy of speaking The Honest Truth. Sign up here to get The Honest Truth delivered every week into your mailbox. It will change the way you think about your investments.

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