AT TIMES like these, when asset values are way down and causing you to lose sleep, you may be tempted to sell your holdings. But Peeyush Gupta, a co-founder of Australian financial planning firm ipac, is telling clients to stay the course - that is, if you have followed the four key principles of investing. These are: buy quality assets; buy them at attractive prices; diversify; and have a long horizon.
Breaching one of those key principles risks a permanent loss of capital. The usual culprit is the failure to diversify and excessive leverage. The current crisis has thrown up numerous examples of this, ranging from retirees who put all their savings into Lehman notes to private clients who have lost substantial wealth, thanks to failed structured notes on which they were also leveraged.
'If your house value falls 15 per cent, would you sell it? You wouldn't sell a good-quality asset just because it has had a temporary fall in price. The test, with respect to stocks, is - are they good quality assets and do they have recovery potential,' says Mr Gupta.
'If they have both, don't sell. You are only crystallising your loss. But if you have poor-quality assets, maybe you should sell. There is no point holding on to a useless asset. In fact, you should not buy a useless asset in the first place.'
ipac clients, he says, are 'holding their nerve'. And the group has not seen a marked upturn in redemptions. Clients, however, are 'uncomfortable, concerned and in dialogue with us'. Most individuals are distressed at the loss of 30 to 40 per cent of their wealth, says Mr Gupta. But should they be concerned? 'It depends on whether you are on track with your objectives,' he says. 'In some cases, clients, though they are poorer on paper, can meet their objectives. So are they necessarily worse off? Unless your objective has changed, why change your strategy?'
Mr Gupta helped to start ipac in 1983 with four other partners, each chipping in just A$20,000. The firm was acquired by Axa in 2002 for US$250 million.
Mr Gupta says that as an entrepreneur trying to make a success of ipac, his personal savings were mostly in cash to balance his business risk. Now that he is no longer a business owner, his personal portfolio mirrors that of his clients, a diversified mix of assets including stocks, bonds and property.
Many people fail to make the shift from entrepreneur to steward of family wealth, he feels. Asia has solid savings and a strong speculative culture, but not an investment culture.
'I think one of the reasons is that the rules for making and preserving money are different,' he says. 'The rules for making money are to take risk and time your entry. That's dangerous for core family wealth. Perhaps people don't understand that they may simultaneously have to do both at different periods of their lives.'
Now that he himself is an investor in ipac portfolios, he also grapples with emotions. 'The hardest thing is I'm human and emotions get to me as well,' he says. 'I try to discipline myself not to look at my portfolio more than every few months. But I take my own advice, I haven't sold any of my assets. My net worth is down like everyone's, but my objective is not compromised. I sleep soundly at night.'
Asian entrepreneurs typically use family assets to help start and fund their businesses. But family and business assets should gradually be separated as an entrepreneur gains success, says Mr Gupta. 'You can have permanent loss of capital in your business and live through that, provided you don't have permanent loss of capital in family wealth.'
Leverage for investments, he says, should be used conservatively. 'Rule number one is you should not rely on income from the geared assets to service the debt. Your income from your job and other investments should enable you to pay the debt, in case you get your timing decision wrong and the market falls, or you can't find a tenant.
'All that is OK if you can continue to hold the assets. The problem is if you are relying on income from the asset, which is not performing in the short term. Often people borrow, and critically rely on the investment to service the debt. That's when they get into trouble.'
A downturn like this is a good time to revisit your goals, says Mr Gupta. 'We've grown richer but not happier. Too many people get caught in a money trap. Money becomes their master. They don't feel happy unless their bank balance is growing. But they forget that their bank balance is there to help them do things that are significant to them.'
This article was first published in The Business Times on November 15, 2008.
