Cut the clutter: The art of subtraction to simplify your personal finance

A common refrain among investors is: I have invested in equities, mutual funds, FDs, bonds, post office schemes, sovereign gold bond scheme, LIC policy, property. Aur naya kya hai?’ (What else is new?)

The plethora of options available today, the dollops of information bombarded every second on social media, and the single-minded pursuit of returns often leave investors in a frenzy and curious to explore new investment products.

As a result, they often lose sight of their holistic asset allocation picture, which matters more. Investors fail to understand that their money is broadly going in the four asset classes—debt, equity, gold, and real estate—irrespective of the manner in which the products are packaged.

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Frequently adding new products to the portfolio is the outcome of a haphazard investment approach which does not meaningfully impact an investor’s financial life in the long run. Such mindless excesses increase the chances of over-diversification and overlaps in the portfolio.

“ is only more where more is no good!” is a popular quote by Frank Lloyd.

Here are a few intriguing questions to elucidate this:

• If you have invested in a pure large, mid and small cap fund, is there a need to add a flexicap or multicap fund to your portfolio?
• If you have invested in debt and equity funds and maintain separate buckets, do you need to add a hybrid fund?
• If you have invested in a Nifty 100 index fund, do you require an active large-cap fund?
• If you have invested in NPS and equity funds for retirement, do you need a retirement solution fund?
• If you have invested in an ELSS fund for 80C tax benefits, should you add another tax-saving fund next financial year?

The answers lie in these questions itself.

Furthermore, if investments are too many and scattered, they become cumbersome to manage and track. In the absence of the breadwinner, it is difficult for the family to consolidate all finances.

Apply filters and eliminate options like how a contestant plays in Kaun Banega Crorepati to get to the right answer.

Refine and reorient

So, how does one avoid arbitrarily adding new products to the portfolio? A counter-intuitive approach could be to take a few actions and a few decisions in personal finance through subtraction.

Apply filters and eliminate options like how a contestant plays in Kaun Banega Crorepati to get to the right answer. Be it weeding out underperforming investments or eliminating overlaps or investing in a new product, an investor can start with asking:

• What am I investing for?
• What is my time horizon of investment?
• Do I wish to take additional risk in my existing portfolio?
• How does the new investment fit in my overall portfolio?
• Am I adequately invested in similar product or asset class?
• Do I need to rebalance my portfolio?

These pertinent questions will refine and reorient investor priorities which truly matter in financial life.

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With 24/7 business channels, social media, advertisements and stock market noise, internalising the mindset of subtraction will not be easy. It is imperative to understand that subtraction is not about discarding something, rather it is about choosing what matters most. It also means one action less to take by not do anything.

Mathew May, an American author, aptly mentions this in his book – The law of subtraction. He explains, “If you focus on what to ignore, what to leave out and what not to do, decisions become exponentially simpler!”

Also Read: Beware, a financial plan that neglects insurance can leave you high and dry

The fewer decisions or actions taken, the more focused the investment strategy will eventually be. Investing is, after all, about making only a few decisions right. Through the power of subtraction, investors can gradually adapt to ignore external noise and peer pressure, tackle the FOMO effect, and learn to make efficient financial decisions.

Roshni Nayak is a Sebi-registered investment advisor and founder of GoalBridge.