Subtracting your way to success with investments

In 1948, the McDonald brothers, Richard and Maurice, temporarily closed their then barbecue restaurant to streamline their entire operation. When they checked their sales, they found that most of their business was coming from only a few products (mainly hamburgers). Now, they had a bold idea: why not focus only on the best-selling products? They cut down their menu from 25 items to 9 items! This move changed with McDonald’s. By reducing their offerings, they could improve the quality of the food, lower costs, and serve more customers efficiently. The rest is history!

But it wasn’t just the McDonald brothers. When Steve Jobs returned to Apple in 1997, he restored more than 90% of the products, leaving only 10. He focused on a few products where Apple could be the best. Jobs’ advice to new Nike CEO Mark Parker in 2006 reflects his thinking: “Nike makes some of the best products in the world. Products you lust after. But you also do a lot of crap. Get rid of the crappy stuff and focus on the good stuff.”

When we want to improve something, we have two options. We can add new stuff or take away existing stuff. This is true for ideas, products and situations. But we usually don’t think about what we can add. Addition feels natural and subtraction requires deliberate effort. So we always decide to add things without even thinking about possible subtractive alternatives.

Sometimes ‘subtraction’ is very powerful in creating simple and effective solutions. While there is nothing inherently wrong with adding, if it is the only way to improve, we may be missing out on potentially better solutions.

When we keep adding and over-diversifying across too many equity funds, we inadvertently accumulate hundreds of stocks, leading to overlap, portfolio clutter and diluted strategies. A simple solution would be to create a cap on the total number of equity funds in your portfolio, say 6-8 equity funds at most. Such constraints impose priority and focus. Any fund in your portfolio should make up at least 10% of your portfolio. Since 10% is meaningful, this will force you to see if the fund is really needed. Create an ‘Ignore’ list of categories that you feel are unnecessary or complicated for your portfolio. For example, you can say sector/thematic funds, multi-asset funds, etc.

The biggest drivers of your investment outcome are your savings rate, equity exposure, rebalancing, diversification and time horizon. You can build simple personalized rules around them. For example, a savings rate of more than 30%, equity exposure at 70% (based on risk profile), rebalancing if the deviation exceeds 5%, diversification across 5 different investment approaches (value, quality, growth, mid-cap and global), more than a period of time of 7 years, etc. You can also build simple rules for recurring decisions like ‘how to invest one time money’, ‘how to invest monthly’, etc.

Most of us tend to panic when the stock market starts to fall. Instead of trying to make decisions in the middle of a market downturn, you can eliminate these decisions by planning ahead and front-loading your decisions. The pre-loaded written plan can be as simple as: What should I do if the market drops 10%, 20%, 30%, 40% and 50%. SIP is a great way to automate your monthly investment. It takes emotions out and ensures that you invest every month with discipline.

Once you’ve built the right portfolio and plan, do ‘nothing’ the default action most of the time. Maintain a high threshold for portfolio activity. Reduce the frequency of monitoring news and your portfolio. The perennial flow of bad news makes it hard not to react, and the emotional pain of temporary decline also increases as you monitor more often. Portfolio reviews once every 6-12 months should be sufficient.

There is a fundamental bias towards new things over the old. The likes of new are the temptation to add new funds, creating unnecessary clutter in your portfolio.

Arun Kumar is Vice President and Head of Research, FundsIndia.

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Updated: 05 November 2023, 10:32 PM IST

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