Psychology Of Investing

Shaikh Jilani
Managing Director, J2 Wealth & Investments

When it comes to investing, a slow but steady approach often helps an individual to win the race, especially when it comes to meeting one’s long-term financial goals. However, along the journey there are a few pointers that one should be mindful of which are as given below:

Preparing for Contingencies
Emergencies such as sudden drop in income can wreak havoc at any stage. But being prepared can lessen its impact by enabling an individual to meet one’s expenses and obligations. Like everything else with personal finance, an emergency fund too is unique to every individual. With emergency funds at one’s disposal, one can avoid running pillar to post for meeting one’s financial requirements.

Asset Allocation
Asset allocation is the practice of dividing an investment portfolio among different asset categories such as equity, debt, gold, cash, etc. One of the underlying principles behind asset allocation is that different asset classes perform or react differently in different situations. For example, during the global financial crisis of 2008, the equity return for the year was –51 per cent while the return from debt was 28 per cent. However, in 2009, as the economic recovery gathered pace, equity return was 78 per cent while debt return was in lower single digit. So, the lesson here is that not all assets can be winners at all times and you cannot predict the winners either.

Selection of Asset Class
Based on risk profiling, it is important to first determine how much risk you can take. It is only on the basis of this realisation that one should proceed to make allocations to various asset classes. Higher the risk-taking ability, higher will be the portfolio exposure to relatively volatile assets like equity. However, if the risk-taking ability is low, then it is advisable to opt for relatively safer options such as debt assets.

Equity and Investing Myth
It is a known fact that equity as an asset class, over the long term, holds the potential to deliver maximum returns. However, investors often tend to focus on the glory stories around equities and believe that is the only asset class worth investing into. This is one misnomer which would do more harm than good. As an investor, it is important to remember that historically there have been periods when the markets have moved lower and sideways for a considerable amount of time, putting to test the nerves of several investors.

Simple Debt Products
Debt as an asset class tends to deliver predictable returns. This feature offers much needed stability to the portfolio. Ignoring this stability-providing asset class is one of the most common follies among the investors at large. There are a variety of debt mutual fund offerings that one can consider making a part of one’s portfolio.

Periodic Reviewing and Rebalancing
Investing is not a one-time activity. Once in every few years the portfolio has to be reviewed in the light of changing realities of one’s life. Sometimes when a particular asset class has rallied significantly – thereby distorting the asset allocation pie – it is important to rebalance at such times.

Right Approach
Getting the above mentioned steps right is no easy task, especially if they are to be executed on an individual basis. One of the options to addressing most of these pointers is through investing in asset allocation funds. This type of fund predominantly invests into equity and debt. A good asset allocator fund tries to achieve the optimum allocation of debt and equity based on the relative attractiveness of the asset classes. In order to achieve an unbiased view on asset class allocation, several funds tend to use models based on which investment decisions are taken. Such a model-based approach ensures that human emotion which could play spoilsport is always kept at bay.

When investing into an asset allocation fund, an investor gets the benefit of an actively managed portfolio with the investment corpus diversified across asset classes, constant monitoring and rebalancing, better risk-adjusted returns and taxation benefits, amongst several others. However, a holistic approach would be to seek the help of an experienced financial advisor who will help straighten all aspects of one’s financial wellbeing.

The writers is a  Managing Director, J2 Wealth & Investments
Email id : jilani@j2wealth.co.in   
Website : www.j2wealth.co.in