Investment Buckets – An Update

Contrary to general belief, the process of studying and learning does not end when you graduate out of college. It is a continuous process. If you stop learning, you will fail to adapt to the changing environment. You know what happens to stagnant pool of water? Same way, in true sense, long term portfolio or building a long term process, you need to adapt. As you learn more, you need to make changes. During the early phase of TIPBlog, I presented different investment buckets that I use or planned to use.

To refresh, these buckets are not asset allocation. How can that be? A true asset allocation should not have co-relation or may have very low co-relation. The ones that I show on this post, are all co-related and hence, not asset allocation. All are equities! When we talk about asset allocation, what it means is savings, FDs, bonds, equities, gold, etc. They are investment vehicles that are likely to provide true asset allocation benefits. Out of all these, I only focus on writing about equities on TIPBlog.

How did I get those percentage? Are they optimum for maximizing returns?

Simple answer is “I do not know”. When we are that the beginning, one needs to make a start at some point. You need to have a starting point. And this starting point cannot be random. In a well thought investment process, the starting point should be based on individual objectives, resources, risk profile, and time horizon. Based on these factors and long term vision that I have for my portfolio, I started out with a framework/guidelines that I had presented in TIPBlog investment buckets. Over last few years, I have learned quite a few things and decide to tweak (note: not change) these percentages.

  • Portfolio 1: Index-Based ETF Fund (10%) The objective of this portfolio is to replicate the general market performance. I am assuming that as Indian GDP grows over time, it will be reflected in the growth of market index. In addition, it also sets a benchmark for my investments. I believe that in 10 years and beyond, the BSE SENSEX, NIFTY, and other indexes, will be higher than today. Having said that, I have observed selection menu is very small, and choice of good index ETFs are very limited. I am stopping short of saying index ETF space is non-existent in India. I have already discussed my index investing approach. Here, I tend to agree with Green World Investor on the present status of ETF industry in India. It is in this context, I reduced my percentage allocation down to 10% (instead of 30%).

  • Portfolio 2: Opportunity Portfolio (30%) Here, I am focusing on capital appreciation. These are mostly value-based opportunistic investments. I invest in companies which I believe are undergoing short-term difficulties but are likely to have higher value in future. I have presented my understanding of value investing landscape and identified what I am (or will be) working on. I have increased allocation to 30% (instead of 20%).

  • Portfolio 3: Dividend-Focused Portfolio (60%) This is allocated to income producing dividend-based investments. The objective is generate increasing passive cash flow and long-term capital appreciation. Here, I am attempting to practice long term buy and hold philosophy. Over the last year, I also discussed how I have adapted on selling decisions. I have increased allocation to 60% (instead of 50%)


TIPBlog Investment Buckets

As you can notice, I haven’t made any significant change in my framework. I still continue to believe this works for me. It provides me an optimum solution at this point in time. It takes sufficient risk to maximize my returns. In search for higher returns, I am willing to take higher risk by allocating more capital to potentially risky companies in portfolio 2. The fundamental notion here is simple. The assumption I make is, even if I lose this 30%, I can still sleep well at night. I can still comfortably pay my bills. My life will not change. However, I will be sad for few days and kick myself for doing this.

Do you makes any changes like this ? How do decide when and what to change?

Facebook User Comments:

6 Responses to “Investment Buckets – An Update”

  1. chetan s. raut says:

    Hi tipguy,
    nice article…but i am waiting for some company or sector specific u not posted such kind of article since long time….

    Chetan Sadanand Raut

    • TIP Guy says:

      Hi Chetan,

      How does it matter that I have not posted an analysis article? May be I am fully allocated? or may it is hard to find something meaningful? May be I am doing something else? 🙂

  2. Raja says:

    Hi TIP Guy,

    This is one of your concepts which has appealed to me the most and i have adopted it for myself. Currently I have alloted a ratio of 30(index),30(opportunity),40(dividend).
    Here are few questions:

    1. I assume these allocations are on cost basis. If yes, then do you plan to do any re-balancing between the different buckets over a period of time ? may be in your yearly review? For example if we allocate say 30k,30k,40k for these buckets and over a period of time say it grows to 33k,33k,48k. Will you rebalnce them to bring it to closer to the original allocation percentages ? Or just let each of these buckets grow in their own way ?

    2. When you do some selling, Will the cash(profit+original capital) come back to their respective buckets for future buying ? Or again there too you plan to do some re-allocation ?
    ( Actually both the points are round about asking the same question $%#?!! 🙂 )
    May be, May be Not!


    • TIP Guy says:

      Hello Raja,

      (1) I keep track of both, allocation on cost basis and allocation on present value. The reallocation is very subjective. There is no hard and fast rules. Sometimes, depends upon cost basis, sometimes present value, sometime purely dividends alone, etc. e.g. ONGC/HDFC Bank… both of these are very concentrated both in terms of cost basis and in terms of present value. But if I reduce them, I lose sustainable dividends (which I believe is relatively safer) for compounding or reinvesting. Relatively being important. So since i consider them low risk and likely sustainable, I continue to be concentrated. Aegis/Graphite/Hawkins are more of sell on extremely high valuations… because the delta beyond the cross over of dividends for next few years (and dividends are relatively higher risk v.s. ongc/hdfcbank). Do I transfer between buckets?

      (2) I do not separate profit+original capital. Once sold, everything becomes cash.

      (3) I keep extremely high levels of cash. I manage cash holistically, i.e. all cash is under one bucket which includes short term, emergency, etc etc you get the point. Once I sell (irrespective of where is comes from) I keep adding to the cash bucket. Next time, when I find something interesting to buy, I check the level of allocation, if low, I buy. If high enough I skip. So far, I have been focusing only on dividend based long term stocks. So there was no priority among the buckets. Moving forward, I plan on doing same. When something interesting come up, then see what is under-allocated and make decision accordingly. I foresee remaining little bit under-allocated in both buckets to keep myself open for both sides. This gives me wider options.

      Does this help?

Leave a Reply