Monday , 22 October 2018

All prediction is dangerous in investing

By Tensing Rodrigues*

Recently a reader wrote, your article about the next thirty year prospects for gold does not say what would be the likely future for gold. It just says uncertain. Can you please help us with your expert knowledge and tell us at this point of time whether it is worth investing in gold for long term?

I can understand such a disappointment. It is human to seek certainty. But unfortunately certainty is not real. Everything is a game of probability. It is up to us to make the bets. That is exactly what a bird does when it sings the break of the day even before it can see the sun. That is even truer for investments. If you see any certainty or are assured of certainty about the performance of any investment you need to pinch yourself whether you are dreaming or someone is making a fool of you.

How can you invest without any certainty? Investment is all about future. How do we move ahead into future without any road map of the future? Just as we move ahead in life by taking calculated risk. We do not know what tomorrow holds. Still we plan for tomorrow’s picnic. Calculated risk means we avoid the extremes. We avoid the options where the probability of losing is very high. But at the same time we do get carried away by the options where the probability of gaining is very high because our calculation is always imperfect. And the least likely event also occurs. So we choose options where there exists a fairly good probability of gaining and do not keep all our eggs in the basket where the probability of gaining is the most.

But probability is not everything because as we said before, even the most unlikely events can occur. Chennai a city that knows only three seasons- hot, hotter and hell (thanks to Anjali Bisaria for that expression) once froze at the peak of summer with cold winds and the occasional snowfall. And that was not during the ice age! It was as recent as in the last week of April 1815. So we look at our investments also from a different angle. Not from the angle of how likely we are to lose but from the angle of how badly we may lose if at all we lose badly. And we avoid those options however unlikely the loss may be.

Now coming to gold we need to be very clear about its role in our portfolio. We do not invest in gold to earn fabulous returns. That gold did return handsomely during a certain period does not change its basic nature. The purpose of holding gold is to stabilize our portfolio in worst of the times because gold is not likely to lose its value as sharply as other assets. Precisely because, most of the time it does not gain value as sharply as other assets. We would like that at least some part of our portfolio holds its value in bad times.

When the good times return, the other assets in our portfolio can lift it up. So how exactly will gold perform thirty years down the line is not of much importance. That it will not crash when everything else may is what matters. So just give gold a small space in your portfolio and leave it to play its role. Of course, this is my personal view not a universal view.

One way to de-risk your portfolio without compromising on returns is to give it time. Essentially you need to split your portfolio into time slices for short medium and a long term portfolio. The time reference is to the time for which you can leave it untouched the time for which you will not need to liquidate it. For a long term portfolio which you can hold untouched (unliquidated) for a minimum of ten years, I feel you can go blindly for a big share of equities.

Over such a time span equity loses much of its risk sting the time is long enough to recover any losses incurred by short term dips. You can hold it literally untouched or do a bit of prudent shuffling. But essentially not do any panic evacuation. Here again crystal ball gazing is useless. You do not intend to buy at every dip and sell at every peak.  You cannot; for you cannot time them. If you ride the upswing and avoid the crash it is more than enough do not get hurt in the process of chasing them. Remember, all prediction is dangerous.

* The author is an investment consultant. Readers can send their comments and queries to

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