Here’s how three-bucket strategy can lead to wealth creation in the long term

By: |
January 8, 2020 12:35 AM

Even in 2008-09, when the mid-and small-cap returns went south by more than 40%, had you stayed true to the investment process, the point-to-point returns would have delivered a double digit return in the 10-year period.

Investors must look at the three-bucket strategy to create wealth in the long run in a disciplined way.Investors must look at the three-bucket strategy to create wealth in the long run in a disciplined way.

In the new year, making new resolutions is one of the most favourite things for many people, right from financial planning resolutions to healthy eating habits and all other resolutions which you can think about. But then investing is not about destination (the return on investment). It is all about the journey (cashflow). Missing the woods for the trees is one thing which every investor would have gone through in their investing journey. Now, how can one be an improved investor in the years to come, starting today?

Never chase returns
Chasing return is a never ending story. As an equity investor, you can never get higher returns year after year. There will be some years when the return will be higher and years when it will be lower. How does one look at factors beyond returns and bring in a process in the investing journey? The most important thing is to have a process. If you have invested based on a friend’s recommendation or chosen a sector just because it has been mentioned by many experts, then that is not a healthy process.

The approach
Compounding is our best friend in the investment journey. It is better to start investing early as compounding takes time. It is observed that we invest taking into account only the return criteria. We should look at ‘process’ as the main arm in the investing journey . Making a process and following the process is ‘boring’. But it’s the boring aspect which makes money and creates wealth for an investor. So, how can we create the process which is easy to set, follow and implement? Investors must look at the three-bucket strategy to create wealth in the long run in a disciplined way.

Three-bucket strategy
It is the asset allocation simplified based on the cashflow and milestone needs of the investor. The first bucket takes care of emergency and liquidity needs and the investment period can be for a period up to 36 months. The asset class can be fixed income comprising of bank FDs, liquid mutual funds or ultra short term mutual funds. The basic criteria is about cashflow needs and immediate money requirements.

The second bucket can be for a period of three to seven years with asset class comprising fixed income and conservative equity and equity mutual funds. Here, perpetual bonds of PSU banks, balanced category of mutual funds and large-cap equity and equity mutual funds can be considered. This category delivers constant return without the possibility of volatility in the returns.

The third bucket is the wealth creation bucket. Volatility in the portfolio in this bucket is a given. This bucket can comprise real estate investments, equity mutual funds in large, mid and small cap .

Maintain discipline and do not fall prey to the recency bias in the investing journey. This, along with rebalancing of the portfolio, would ensure a smoother investing journey. Since early 2018, the equity returns in the portfolio,especially the mid-and small-cap has disappointed the investors and has led many to revisit the investment.

Even in 2008-09, when the mid-and small-cap returns went south by more than 40%, had you stayed true to the investment process, the point-to-point returns would have delivered a double digit return in the 10-year period. What is important is strategy and implementation. In the new year and in the years ahead, pay heed to these and make them part of the investing armour.

The writer is managing partner, BellWether Advisors LLP

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1SBI EMI Moratorium: Know the processing fee, interest rate calculation during extension period
2Tax Talk: Challenges in faceless income tax assessment scheme
3National Pension System: Exited NPS pre-maturely? You can join again