The investors were a retired couple. They had investments in a number of funds, mostly equity. They had a number of needs. One, they needed a monthly amount regularly to meet household expenses. Two, they wanted an emergency fund that could be withdrawn at a short notice. Three, they had some large family-related expenses coming up in the next three years. Four, they also wanted to set aside some money to fund their monthly expenses far into the future as prices rose and needs changed. Even though the couple had chosen their funds well, they weren't sure whether they were on the right track. Their needs were ordinary. Even then they weren't confident that their investment portfolio would do the job for them.
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Does their predicament sound eerily familiar? Well, most of us nurse the same fear. We are not sure whether our various investments will be enough to take care of all our financial goals. Why is it so? Well, a long list of financial goals and investments populate in our head. But we seldom sit with a pen and paper (or open an excel sheet) and tally them. If you want to achieve every financial goal in your life, you must first identify each one of them clearly. Next, earmark an investment specifically for each goal. This is the only way to achieve every goal without fail.
Understanding how an investment portfolio maps onto a set of different needs is practically impossible. Some of the needs are contradictory. For example, a short-term income needs stability while for the long-term nestegg, high returns are more important. Looking at a list of ten or more funds, with innumerable SIPs, dividends, redemptions, reinvestments, and so on, it is almost impossible to figure out what is going on with your investments or whether the portfolio would eventually do the job for you. All you can do is to look at the overall value of the portfolio and get worried and panicky when it declines. In fact, it's entirely possible that your investments are on the right track if one evaluates them piecemeal according to separate goals but the overall picture is unclear.
So what's the solution? Some sophisticated analytical tool that will give us an insight? No, actually, it's something that someone in your family probably already practices, or at least used to in the decades gone by. The solution is bags-- separate bags for each need.
Do you remember how an old aunt used to save money in little bags, each for a different purpose? Lots of us do, or at least we did it in earlier days. Many of us know of women in the older generation who would run her family's entire life's finances on this basis. They typically have little pouches with a drawstring around its neck, like a pajama. When a husband brings home his monthly salary, they put some money in the vegetables pouch, some in the milk pouch, some in the household servant's pouch and the dhobi pouch and so on. There were also a few bigger pouches that were meant for savings, as for a daughter's wedding. This pouch would be converted into some gold trinket or the other every few months.
While financially sophisticated readers will call this system primitive and sub-optimal, it has a lot going for it. It was a simple system, easy to implement and easy to understand and above all, it worked. Most importantly, it incorporated one of the golden rules of personal investment management-- separate portfolios for separate goals. The old lady would not have been such an outstanding household manager if she had kept all the money into one big bag.