Do you have an investment constitution?

Every year on January 26, India celebrates the Republic Day. It's in recognition of the inception of The Constitution which came into force post-independence in 1950. It also symbolises the complete declaration of the sovereignty, the republic character (where the head of the state is elected and not a hereditary monarch) with certain principles expressed. The constitution of India replaced the dominion status of India and turned into a republic. The original constitution is hand-written, also the longest in the world.

Constitution in simple could be described as a compilation or composition of something together. On this republic day, one could take an opportunity to define their investment constitution. The Indian constitution could provide us with clues, ideas and direction for such an exercise. While it's a document that lays down the framework that clearly defines the various code, structures, procedures, powers, duties and rights, it is also amendable.

The parallel that could be drawn here about the personal investment constitution is that a clear preamble i.e., an objective could be defined which largely puts the rationale for the investments as such. It could elaborate on the principles or guidelines that describes how the investment must be taken care of. Here, one could consider the sustainability perspective or ESG (Environmental, Social, Governance) methodology or even other similar complaint practices. This definition allows one to narrow the investment universe and thus check for those which fall within these broader guidelines.

The Indian constitution was drafted by the constituent assembly, which was elected by elected members of the provincial assemblies. It took almost three years to draft holding eleven sessions over a 165-day period. The drafting committee was chaired by Dr. B.R. Ambedkar who was considered a constitutional expert having gone through constitutions of 60 different countries, so was influenced from various sources. The personal investment constitution could also be designed with inputs across self, spouse (or family stakeholders) and an advisor or presided by an advisor. This ensures a scope for discussion and debate among the participants while dipping insights from the advisor (who has prior experience) to arrive at a better document.

The Indian constitution originally had 395 articles but now has a total of 448 articles, after 100 amendments. Articles are separate and distinct part of the instrument i.e., constitution which gives a series of rules, stipulations, etc. Similarly, one could spell out different articles that govern the investment thesis in accordance with the preamble. This allows one to build a portfolio that expresses the boundaries of strategic and tactical allocations, the asset allocation and the various diversification methods to follow during the investment journey.

The Indian constitution clearly entitles certain rights to the citizens while distinguishing the duties expected out of them. Drawing an analogy, the investment constitution provides the entitlements (obvious as it's for the benefit of the self, who's detailing it) but personally, I believe, duties should weigh over the rights for a successful investment progress. Duties uphold the initial path of investment rationale and allow to take disciplined actions.

Precedents are rules or principles established in previous legal case which turn out to be a reference in subsequent rulings. Similarly, the personal investment constitution could utilize the investor's experience across budgeting, saving and investing. The income growth and expenditure patterns could be illustrated to better understand their history of investing.

The Indian constitution is not just an exhaustive literature which exhibits the aspirations to turn into a contemporary nation but also weighs in the historical perspective and the civilizational legacy. Likewise, an investment constitution should base the various outcomes and the behavioral reactions to multiple events of the past leading to investing decisions. These documented references could be used to derive a better-fit constitution.

Though constitution could be amended by the parliament for any provisions including the preamble of the constitution, as explained by the Supreme court it shouldn't alter or destroy the basic structure. Amenability of investment constitution reflects the level of dynamism and flexibility of the investment thesis in sync with the emerging changes in the investment options. This allows one to not just stick to the conventional avenues like equity, gold, debt, etc. but also explore newer avenues like Invits, REITs, Options, cryptos, etc. The amendment can't be done unilaterally and as referenced should retain the basic structure of the constitution which reflects the risk appetite of the individual.

Thus, an investment constitution details the individual's investment philosophy, their inhibitions or reservations to the process and outlines how to better it over time while preserving their risk tolerance. Where's your investment constitution?

-(The author is a co-founder of 'Wealocity', a wealth management firm and can be reached at [email protected])