We have seen it happen in offices as much as we have seen it happen in joint families. The person who cannot say no to taking on work, gets so overburdened with everyone’s work, that it renders her or him quite unproductive.

And I have seen the same thing happen to portfolios. Wealth owners won’t keep liquidity in their bank accounts or money market funds because bank accounts give ‘low’ returns. And then we will dip into our portfolios, which are designed for long term goals, as if it were a bank account.

In our article for the month of March 2022 we said that if we treat a fiduciary like a vendor, we can only pray that he or she doesn’t become one. The same can be repeated here. If we treat a long-term portfolio like a bank account, we can only hope against hopes that it won’t actually behave like one.

When we make impactful expenditures, such as purchase of property or investment in a business venture, etc. with the presumption that we will only ‘temporarily’ take money out of a long-term portfolio, we are treating the portfolio exactly liked that overworked office colleague or member of the family. Making it do what it won’t say no to.

We are taking the money out of the portfolio because it’s easy to do so! We are taking money out of a place that was not built for one’s short-term needs. The nature of our portfolio has to be long-term if we want to effectively to use it for funding long-term goals.

It is long-term in nature because financial markets, and especially equity markets, don’t grow consistently at the average rate of return. They grow in spurts and bounds during some periods, lackadaisically in others and actually lose money in some. And the undeniable part of all these ups and downs is that they cannot be predicted. And therefore, staying invested and making planned expenditures is a very essential requirement for a long-term portfolio to be productive.

What we need for an unplanned outflow must remain outside of the limits of a planned long-term portfolio. Else, like that overburdened colleague, we will make the long-term portfolio an unproductive member of our financial assets. To expect that portfolio, or plan, to accomplish a singularly focused goal well, however much hoped for, would be impractical. It would be unrealistic.

- Devang Shah

June 1, 2022

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