Basics of Investment Strategy Plan


  1. It should be fairly straightforward. No need for assessment of complicated risk tolerance (graphs/psychological tests etc). Follow the KISS principle (Keep it Simple and Stupid).

  2. Identify the objective as Maximum Terminal Value (Growth) / Regular Cash Flow or a combination of both in varying degrees.

  3. Third objective is Capital Preservation - for those who have adequate money and now do not want to risk or have hassles. Precious FEW. Capital Preservation is also good for something like saving for a downpayment.

  4. Capital preservation and Growth objectives are polar opposites and are not possible to get in a single instrument. Any instrument which claims to give both is an oxymoron like reality television, selfless politician, mature baby, etc.


  1. Time Horizon: Select the particular appropriate time horizon. For retirement corpuses, you should consider the life expectancy of both the husband and wife plus if you want to leave for your kids. The longer the horizon, the more equity is appropriate. For say child education (a very common goal), initially it should be in equities and as the time for actual money comes closer, an yearly or 2-yearly change of the allocation pattern according to the graph should be done. The corollary is if you need money in the next 5 years, do not invest in equities. See Graph

  2. Cash Flow: If regular income required is upto 2-3% of the total portfolio (this is based on US data, but for our country, even 4-5% should be a safe and reasonable yield), then an all-equity portfolio is ok. If more is required, then a blended portfolio of 70:30 or 60:40 (equity:debt) is advisable. Either a SWP (Systematic Withdrawal Plan) or periodic sellings or dividends (from stocks) or interest income is advisable depending upon the instruments.

  3. Return Expectation. It should be remembered that all asset classes except short-term debt instruments give returns in lumps. That is, for some periods the asset class will give magnificent returns for months, years to decades and at other periods, the same asset class can give flat / negative returns for similar periods.

  4. Individual Pecularity. Best example of this is ownership of gold. Some people get a warm feeling by having this asset class in their portfolio, while others just hate having an asset class with low returns and high volatility. Although, emotional attachment to various asset classes may not the best thing to do, but if such a thing means a feeling of “All is Well” then such personal preferences should be followed.

Some important CHECKS:

  1. Check availability of decent amount of living expenses (usually for next 6 months) in a liquid instrument, which canbe cash, savings account, short-term/liquid debt funds or FDs. Monthly Living expenses = your yearly expenses (including the compulsory and the arbitrary expenses) divided by 12.

  2. Check Insurance requirements (life, health, car/bike, etc).

Depending upon the above criteria, the appropriate allocation into stocks, debt and others should be done.

Other important Points to remember:

People chasing heat, trying to get better returns, forget about the law of averages and invariably in-and-out relatively backward—lagging the market by going into what used to work instead of what will work.

No matter what portfolio you choose, realize that looking back, you will always wish that you had allocated more to what turned out, retrospectively, to be the best assets.

If you have less than 50lakh to 1 crore to invest, buying mutual funds is cheaper. If you’re richer, you can and should buy individual stocks or if possible, bonds (eg SBI bonds, etc). The more money you have, the higher the proportion that should be in underlying stocks because in large volume stocks are cheaper to own than anything including mutual funds, ETFs, or any other form of equity.

“You must concentrate to get wealth, diversify to protect wealth.” Those who got rich on one, two, or ten stocks are fortunate fools.

As no one equity type outperforms all of the time diversification helps spread risk between countries, industries, and companies.

Always Remember You Can Be Wrong. So you need to check things and modify accordingly.

As a general rule, it canbe assumed that about 70 percent of return in the long-term comes from asset allocation (stocks, bonds, or cash), and about 20 percent comes from subasset allocation—those decisions regarding types of stocks to own— whether to have large caps or mid-small caps, or foreign vs domestic, value or growth, sectors, and so on. And rest by individual stock selection. Remember, you do not need the best performing stocks/funds of all time, you just need to be in good ones.


When your asset allocation is out of your intended variables, then you should re-balance to get it to the right proportions. This canbe done by either selling the asset which has become higher than intended or buying the asset which has become lower than intended allocation (in case you have surplus). Remember, don’t sell to “lock in profits.”

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