Risk & Investing - What The PNB Saga Taught Me
It is sad to note that the Punjab National Bank has suffered extensive loss on account of absence of adequate surveillance systems, allowing two employees, incur the back a loss that the other 9,998 employees of the bank may not be able to overcome. (Assuming Punjab National Bank employees 10,000 people in all).
While the episode is a sad reminder that in Public Sector banks, there seems to be a general apathy towards doing commerce, along with aspects relating to accountability, risk mitigation etc.. seems to be broken. Here, we are examining the learnings that we may have as investors from this episode.
The valuable learnings for Investors in this predicament:
Diversify your portfolio adequately so that one class of asset isn’t more than 30 % ( be it equity, debt, real estate, Gold etc..) this means that your max loss on account of a particular sector going down will stay limited to that sum only. Also you are spared of your entire portfolio being affected by market cycles. As you are aware, different asset classes have differing cycles of ups & downs. Hence, an adequately diversified portfolio will ensure that the portfolio is insulated largely from the negatives of that sector’s negative performance.
Diversify your portfolio to ensure that no more than 10 % of your holdings is in one stock, company, one company FD, etc. This way even if that investment turns up ZERO, you are not left fatal.
Ensure you take a critical evaluation of your portfolio at least once every 6 months, so that you can identify some of the underperformers early on. Also, you need to take affirmative action of exiting these investments even if they are at marginal loss. If one is not satisfied with the reasons given or if in due time, say 6-9 months, things don’t change for the better, then you should take action.
Ensure you don’t invest into anything that appears TOO GOOD TO BE TRUE, because it probably is. Especially some of these off beat ideas. If you have enough wealth set up for your long term needs, then you may toy with a small sum, say 10 %, knowing that these high risk ideas will turn up ZERO.
While RISK is always around us, these are but some simple ‘Rule of thumb’ ways in which one may mitigate the risks that one faces while investing.