Ensure Your Portfolio Is In Sync With Your Goals

In an ever-changing financial landscape, investing money judiciously can be quite challenging. Besides, for those investors who have a habit of allowing emotions to influence their investment decisions at different stages of their investment journey, the process becomes even more complex for them. 

Hemant Rustagi 
Chief Executive Officer, Wiseinvest Advisors 

In fact, many investors falter at the initial stage itself by initiating their investment process without having an investment plan in place. Therefore, important steps like establishing their investment goals, setting the time horizon and target for each one of them as well as working out how much investment can get them to the target are ignored. Considering that time horizon plays an important role in deciding an appropriate asset allocation, not determining it at the start compels investors to sideline the most important aspect of portfolio building. Since the selection of investment option gets precedence, an opportunity to balance risk and reward is lost. 

Time horizon is the expected number of years you are likely to remain invested to achieve an investment objective. If you intend to invest for longer time horizon, you would generally have the capacity to invest in riskier or more volatile asset classes as you can wait out inevitable ups and downs of the markets. On the other hand, if you intend to invest to achieve a short-term goal, you are likely to have less appetite for risk-taking. 

If you want to achieve your investment goals over the short, medium and long-term horizons, you must decide your asset allocation first and then select investment options. Asset allocation is an investment strategy that allows you to choose among various asset classes such as equities, debt, real estate and commodities. Therefore, asset allocation should be an integral part of your financial planning process. Remember, a successful asset allocation strategy requires a commitment to keep a designated percentage of assets invested in their respective classes, regardless of the current performance of those classes.

The type of asset allocation strategy that can work the best for you would largely depend on your ability to tolerate risk and time horizon. Risk tolerance is your ability and willingness to take risk in order to achieve higher potential returns. Therefore, if you have high-risk tolerance, you will have the capacity to take market volatilities in your stride to enhance your chances of earning higher returns. On the other hand, if you are a conservative investor, you would prefer investment options that will preserve your capital. 

Besides, you need to be aware of different risks associated with investing your money. Some of these are: 

1. Market risk 

Market risk is the risk that the portfolio value will fall due to fluctuations in the prices of securities. Diversification helps in managing risk in the portfolio. There are different ways to diversify the portfolio, such as by investing in different asset classes, sectors, market capitalisation as well as geographies. Another important strategy to manage risk is to rebalance the portfolio periodically. This helps in buying low and selling high in a disciplined manner. n 

2. Longevity risk 

One might outlive one's assets. Hence, it is absolutely necessary to design a portfolio that has the potential to provide positive real rate of return over time. 

3. Inflation risk- 

Inflation risk is the risk of losses resulting from erosion of an income or in the value of assets due to the rising costs of goods and services. It is one of the major risks for investment in debt and debt-related securities. 

4. Behavioural risk 

It is a well-known fact that uncertainty is a natural part of investing. However, many investors do not act in their own best interest when faced with uncertainties. This causes a substantial impact on their investment results in the long run. Therefore, the key is to stick to your investment plan, irrespective of the market condition. 

5.Sequence risk 

Although having a financial plan and following it in a disciplined manner helps, you can still have the misfortune of experiencing a market downturn just around the completion of your time horizon. 

Therefore, it pays to start protecting gains by altering asset allocation of the long-term goals in a phased manner, say around 12-18 months, before the target date..