Portfolio Ideas: How portable are your investments?

Do you believe that real estate and physical gold are the only assets that can help you accumulate wealth? Are you planning to invest, having just begun your professional career? In this article, we discuss the reasons why you should depart from the earlier generation’s mindset and include financial assets in your investment portfolio.

You may have lived in a household where your grandparents and parents accumulated wealth investing in real estate and physical gold. But you cannot possibly amass wealth the same way! Why?

Your grandparents and parents would have typically worked in the same location through their career. So, it was meaningful to buy a house property. And when they saw real estate prices climb up, they also smartly invested in land. There was, of course, physical gold, which would be used as collateral to raise money at short notice.

You do not live in the same world. You do not have a guaranteed job as your parents did. And that means you must be willing to change locations in search of better work opportunities. What will you do with your house property then? You may, of course, choose to let out your house on rent. But the rental yields will be low, given the high purchase cost of your house.

What about physical gold? You have easier ways to raise money at short notice than use physical gold. Besides, renting bank lockers to store your physical gold can be quite challenging! Not to mention the fact that you will lose a significant amount on the spot rate when you sell physical gold.

So, what should you do? You should embrace the fact that there are investment assets, perhaps, more appropriate for your life goals than real estate and gold. And you should realise that when you start your professional life.

Your investment assets should align with your human capital. By that, we mean that if your work requires you to move from one city to another, your investment portfolio should have financial assets, not physical assets. This is because financial assets are portable; physical assets are not.

We refer to this structure of your investment portfolio as “Portfolio Portability”. So, the more financial assets you have, the higher your investments’ Portfolio Portability. This way, your continual change in work location may not hamper the returns on your portfolio.

Also, given your long working hours, transacting financial assets online is easier. You should, therefore, have equity mutual funds, bank fixed deposits, tax-free bonds and financial gold to improve your Portfolio Portability.

There are, of course, exceptions to the rule of Portfolio Portability. For one, you may have accumulated enough financial assets and want to spread your risks into physical assets such as buying rental properties or land. This typically happens when you are living abroad and prefer to invest in your hometown. While investing in physical assets in your hometown is not necessarily attractive, it certainly offers emotional satisfaction. For another, you may have a craving to accumulate passion assets. These are assets that you start collecting as a passion which later turn into investment assets. Examples include antiques and paintings.

There are several other rules relating to Portfolio Portability. An important rule is that you can reduce your Portfolio Portability as you approach retirement. This is because real estate serves you well in your retirement than in your working years. You can earn steady cash flows in the form of rentals to substitute active income. Or use your house to get reverse mortgage line of credit.

So, as the year draws to a close and Christmas is celebrated, make a resolution — that you will align your investment assets with your human capital. Importantly, stop believing that real estate and gold are the only assets that can get you rich.

The writer is the founder of Navera Consulting. Send your feedback to portfolioideas@thehindu.co.in