Feeds:
Posts
Comments

Posts Tagged ‘risk tolerance’

With literally thousands of stocksbonds and mutual funds to choose from, picking the right investments can confuse even the most seasoned investor. However, starting to build a portfolio with which mutual fund or stock to buy might be the wrong approach. Instead, you should start by deciding what mix of assets in your portfolio you want to hold – this is referred to as your asset allocation. You should consider an asset allocation strategy based on your

  • Time horizon: Asset allocation will depend on how long can you hold on to that particular asset and whether you need it for a particular goal. If you need any of your assets for let’s say a down payment for your house which is due next year, then probably holding debt/fixed income oriented instruments is an option you should consider. Examples of debt include Bank or Corporate Fixed Deposits, short term bond funds, short term bonds and ultra short term or liquid Funds. On the other hand if you have a long term goal like retirement, you can allocate a large portion to equity oriented instruments and lesser towards fixed income oriented instruments. As you move closer to the goal, you can keep reducing the equity portion while increasing the debt component.
  • Risk tolerance: This is different for each one of us. An individual should have a realistic understanding of his or her ability and willingness to stomach large swings in the value of his or her investments. Risk tolerance will depend on age of an individual – middle aged individuals generally tend to be more risk tolerant, as they may have more capital available for investing and have longer term goals.

 

In a volatile market scenario like the one we are witnessing now, and have also witnessed in the past, asset allocation becomes all the more important. The table below shows Sensex High and low on various dates. It also shows percentage fall from high. As you can see , the 1 year returns are as high as 105.9% from April 2003, but are also accompanied by a negative 1 year return to the tune of -31% from January 2008 during the US subprime crisis. Thus, had someone invested all of their money in equity prior to 2008 without a proper asset allocation in place, he would have incurred high losses in 2008. If someone would have invested keeping their goals, time to goals, risk tolerance, savings and expense pattern in mind, they could have held on to their existing investments while strategically rebalancing their portfolio as against panic selling and booking losses. The situation that we are facing now in 2015 around the Greece bankruptcy crisis and Chinese slow down have also resulted in Indian markets correcting significantly. The fall might look attractive to a lot of investors, and they might start buying irrespective of the asset allocation they might have charted for themselves. In our opinion, such events will come and go, and it will always be a challenge for investors to know how much further they could fall. Therefore instead of trying to time the market or haphazardly investing in what looks attractive,e one should go by ones pre defined asset allocation, because what looks attractive today may lose its sheen tomorrow.

Table 1 : SENSEX fall history

UntitledSource: Bloomberg, Reliance Mutual Fund

Historically, broad asset classes move in relation to each other are fairly consistently (for eg., when stocks are up, bonds tend to be down and vice versa). In diversifying the allocation across asset classes, you can potentially create a portfolio with investments that do not all move in the same direction when the market changes. However, if you only spread investments only by industry (eg. automobiles vs. pharmaceuticals), they are all in the same asset class (i.e., all in equities) and respond similarly to market changes. You are therefore open to much greater market risk. Asset allocation helps keep volatility in check.

Ultimately, there is no one standardized solution for allocating your assets. Individual investors require individual solutions. Asset allocation is not a one-time event , it’s a life-long process of progression and fine-tuning. Empirical data shows that it pays to be diversified across asset classes.

Read Full Post »

“Seek not greater wealth, but simpler pleasure; not higher fortune, but deeper felicity.”

It will be 100 years next year since the return of Mohandas Karamchand Gandhi from South Africa, and the start of the freedom movement in India. Whilst the story of his Experiments with Truth is well known, a lot of his principles have great value today in everyday life, and also when applied to your investment portfolio. Here are few of our favorites:

Faith & Patience: According to Gandhiji, one should have complete faith in himself in order to achieve something in life. Faith is also largely associated with patience. He famously said –  ‘If patience is worth anything, it must endure to the end of time. And a living faith will last in the midst of the blackest storm.’ For someone investing in equities, patience is the key. Stock markets are not a place where one should enter to make quick money, but should stay invested for the long term to get the best out of it.

Learning from your errors: “Freedom is not worth having if it does not include the freedom to make mistakes.” – M K Gandhi.So if you are doing something, in all possibility you will fail or make mistakes. But the beauty of mistakes is that we get to learn from them. While investing also you will make mistakes, you will take wrong decisions, but without getting discouraged about your past fallacies you should follow a properly laid down path of action and reach your goals. Seek professional help if necessary and learn from your mistakes.

Discipline: Discipline is a virtue which applies everywhere and in all streams. If you are following a disciplined investment strategy, you would not only be able to achieve your goals but also be able to experience what is called financial well being for you and your family.

Live as if you were to die tomorrow: We live in a world where everything is uncertain. Therefore, making provisions for unforeseen events is a necessity. Plan for contingencies, have a will, and always ensure that you have enough insurance so that you and your loved ones are not left in the lurch due to a serious illness or in your absence.

Live in the present: It is often observed that we ponder too much about our past losses and worry about our future. Trials and tribulations are a part of our lives. Instead of cursing your past and losing sleep over your future, you should invest for a better future by clearly articulating your goals and then working towards them, so that you lead a serene financial life.

Adhere to your values: There might be many instances when an investor is tempted by greed of short term returns or fear of the unknown. Targeted Asset Allocation should be the guiding light for all your investment related decisions as it is arrived at after optimizing an investor’s risk tolerance, goals and investment time frame.

Rebalancing is the Key: One of Gandhiji’s quotes goes – ‘It is Ego we cannot forgo. But what ego does is parts us from our own selves, our loved ones.’ It is a deviation from what we should be doing. Similarly, when our portfolio deviates from its original desired level of target asset allocation, we should make requisite changes. We should rebalance the portfolio at regular intervals and make it adhere to its values.

Some of these values and principles are applicable and guide us in all walks of life. Same is the case with Gandhiji’s principles, simple yet applicable to each and every thing. Follow these simple principles to lead a more efficient and fulfilling financial life.

Happiness is when what you think, what you say and what you do are in harmony.

 

 

 

Read Full Post »

%d bloggers like this: