One must alter investment strategy. Know why!
You would definitely agree to one point that the ongoing pandemic has made us realise many things, the major one being personal finance. Things like having an adequate emergency fund in place as well as having a life and health insurance can help us in being at better place when it comes to our personal finances. Side by side, one must not forget their investments. Many a time, it happens that we deal with our investments more aggressively and think that we have the capacity to bear losses. However, unless one experiences such situations, one is not able to gauge whether or not he/she is an aggressive risk taker. To cope up with such a situation, it’s better to alter your investment strategy in order to match your actual financial behaviour. Here, we have listed a few reasons to amend your investment strategy.
Understanding your risk tolerance level is of utmost importance. Not just that but you should also understand how much risk you can actually take. This should be done even before you think of investing. Assessing your risk tolerance level would help you to understand how much you are willing to take the risk. Say for instance, if you think you are able to bear 30 per cent of the fall in your portfolio value, then this is the amount of risk that you can willingly undertake. Ideally, your willingness and ability to take risk should match. This would show that you have perfectly understood the level of risk you can actually undertake.
But many times, people just go ahead with investing without understanding their risk appetite. Further, when crises like situation arises and market tumbles, you start getting anxious and exit your investments at losses. Hence, in such a situation, you are required to redefine your investment strategy and invest in a way that suit your risk appetite.
In the short-term, usually, the risk-taking ability of even the aggressive risk taker is low. Hence, it is better to avoid investing in equity for the short-term unless you make your living from share trading. This is because, in the short run, equity is highly volatile and can lead to undesirable results. However, in order to earn short-term gains, many people take such risky bets. So, if you are someone who has taken such bets, then it’s time to re-assess your investment strategy and alter the same depending upon your financial goals. In the short-term, try to focus more on money market and short-term debts so that, in the long-term, you can consider investing in equity.
It is rightly said that, never put all your eggs in one basket. Similarly, never put all your money into single instrument as well as in a single asset class. You should diversify them across various securities and asset classes. Diversification helps you in reducing risk. However, some people carry herd mentality and take decisions based on what others are taking without any self-analysis. This often leads them to invest very haphazardly. It can also make them bet heavily on single asset. If that’s the case, then, it’s time to revise your investment strategy and diversify your investments across various asset classes.