Stay Focused In These Turbulent Times
Chief Executive Officer, Wiseinvest Advisors
One of the key factors that determine the level of success you can achieve is how you manage to keep your investments on track through a defined time horizon. The most efficient way of achieving this is to have an investment plan in place. In fact, a comprehensive financial plan is the first step towards securing your financial future. For example, if you are at the start of your career, a financial plan can usher discipline into your investment process. Besides, by starting your investment process early, you can benefit a great deal from the ‘power of compounding’.
In other words, even by investing a moderate amount every month, you can achieve your goals without too much of stress. Financial planning is actually a multi-step process that provides you with an in-depth review of your current financial situation and a blueprint that shows you how to achieve your investment goals. Some of the key factors considered in this process are your income, expenses, current savings and investments, current insurance policies and estate planning.
An important step in this process is to list out your goals i.e. short-term, medium-term and long-term ones, and then work out a time horizon for each one of them. The next step would be to quantify these goals i.e. how much money you would need to generate over a pre-defined time period to achieve these goals. Having a goal helps in keeping the efforts focused in that direction. An important aspect of quantifying the targets is to take inflation into account. By failing to do so, in all likelihood, you would have a shortfall after the designated period.
An analysis of these details can help you ascertain the kind of returns that would be needed to achieve each of your goals and what kind of risk cover would be needed in the form of life and health insurance to protect you and your family. You also get an analysis of your emergency fund, which is the amount of money you must have in the form of investments that can be encashed readily so as to tackle any financial exigency.
Then it’s time to decide the right asset allocation and select individual investment options to achieve these goals. Here, time horizon plays a key role. For example, for a short-term goal, you need to focus on debt and debt-oriented securities as capital preservation is a priority along with earning modest returns. Similarly, for long-term goals, equity has to be the mainstay of the portfolio as it has the potential to not only outperform other asset classes but also provide positive real rate of returns i.e. returns minus inflation.
Besides, a disciplined strategy of investing at a pre-decided interval not only helps tackle volatility but also allows for building a large corpus through smaller contributions. It is heartening to see an increasing number of investors in our country following this approach. Over the last few years, systematic investment plan (SIP) has emerged as a popular mechanism for investing in equity funds. However, while SIP is an efficient method of turning volatility to one’s advantage, one can’t undermine the importance of investing long-term lump sum money in equity funds periodically.
A combination of these two investment strategies can get the best results over the long term. The key, however, is to remain committed to stay invested for a pre-decided time horizon. Unfortunately, many investors, despite showing a great deal of enthusiasm at the start of their investment process, falter when they are faced with a market situation like the current one wherein there has been a steep fall in the valuations of their portfolios due to the stock market getting impacted by the pandemic. No doubt, it can be quite tough to handle such a situation even for an experienced investor.
The prudent way, therefore, is to stay focused on investment goals and continue the investment process uninterruptedly. Remember, a tentative approach could compel you to analyse the situation afresh every time you are faced with volatility. Invariably, you would end up taking decisions that are driven by emotions and the current market moods rather than any logic. Hence, it‘s time to adopt a ‘buy and hold’ strategy to get the best from equities.