Best thumb rule: avoid thumb rules

The idea that one should re-plan one's investments in response to market conditions is built deeply into the received wisdom about how money is to be managed. Dhirendra kumar writes.

The idea that one should re-plan one's investments in response to market conditions is built deeply into the received wisdom about how money is to be managed. So much so that most of us assume that reacting to, or anticipating the various investment markets is all there is to investing. The stock markets fell sharply last week, how shall I react? The commodities bull-run has come to a halt, how shall I react? And so on.

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While this may be true for active traders, this is generally misleading advice for those who save and invest. The right triggers for re-planning your investments would be any change in the circumstances of your lives, rather than anything in the external world. Areport that reveals high cholesterol in your bloodstream should rate well above bad news about a company making cholesterol-lowering drugs.

Even when it does pay attention to individual needs, the standard wisdom about investment planning invariably falls victim to stereotypes. You are a senior citizen? Then equity is not for you. Regardless of the fact that you need the money only to bequeath to your grandchildren, or that your nest-egg will have to fight inflation for another two or three decades and can't do without the boost from equity. In sharp contrast, an investor in his thirties is better staying away from equities if he has family obligations.

Thumb-rules are just that: thumb-rules. They are a good starting points, but that is all. Unless your own circumstances are exactly identical to the stereotype on which the thumb-rule is based, it is unlikely to make for an actual recipe of actions that are suitable for your investment strategy.