LOOK FOR THE RIGHT BALANCE IN YOUR PORTFOLIO

Investing one’s hard-earned money can be quite challenging. While on the one hand the challenge could be to decide where to invest money, on the other hand it is equally important to follow the right investment strategy. Needles to say, most investors face a number of dilemmas during their defined time horizon. Only those investors who keep their focus on investment goals and continue their investment process uninterruptedly achieve investment success on a consistent basis.

It has often been observed that even those investors who initiate their investment process through a well-designed investment plan make irrational decisions when faced with difficult market conditions. One of the reasons responsible for this kind of reaction from investors is the gap between the perceived risk and unrealistic expectations in terms of rewards. Most investors aim to get the highest possible returns. Although there is nothing wrong with that, their penchant for safe investment options often creates a gap between what their portfolios are designed to achieve and what they wish to achieve. The resultant desperation often makes them take abrupt investment decisions.

The truth is that if an investor doesn’t take enough risk on his portfolio, higher returns would remain a distant dream. At the same time, taking too much risk may turn his dreams into his worst nightmares. If you are one of those investors who are looking to plan for your financial security, you must find a balancing point that can help you achieve your investment goals in line with your risk-taking capacity. This is where an asset allocation strategy has a role to play. Asset allocation is the process of combining various asset classes such as equity, debt, real estate, and commodities into a portfolio. It helps because if one asset class is losing money, the other asset class may be earning for you.

Remember, investing pre-dominantly in one asset classes has its pros and cons. For example, if a substantial part of your portfolio consists of securities belonging to a risky asset class like equity, the end result can deviate substantially from your expectations over the short to medium-term.  Considering that asset allocation is the most important factor in determining the kind of returns you can get on your investments over time, it must be the mainstay of your portfolio. Asset allocation is a form of diversification that reduces your portfolio risk more than it compromises returns.

When you invest in two different asset classes that tend to go in opposite directions in different market conditions, the combination is likely to have a stabilising effect on your portfolio. For example, the stock market does well during an economic boom, and loses ground during recessionary times. The bond market, however, goes in the opposite direction. While the recessionary conditions are good for the bond markets, a booming economy is not so good for it. Besides, you must ensure that you have adequate diversification within an asset class.

Remember, a well-diversified portfolio reduces the chances of your portfolio suffering from risks that are usually associated with having concentrated holdings. In other words, diversification helps in minimizing the impact of any negative performance in either a sector or industry or an investing style. It is important to have flexibility in your asset allocation strategy so as to accommodate changes in your financial circumstances as well as changes in the economic cycle.

Considering that the economic environment has a direct impact on the behaviour of the financial markets, the level of flexibility in your portfolio holds the key to how you can handle both positive and negative impacts, especially during the short and medium-term. It is vital to keep certain key points in mind while deciding your asset allocation and practicing it over a period of time. The key ingredients should be your time horizon, investment goals, as well as your risk tolerance. As different asset classes behave differently over different time periods, a carefully designed portfolio can help in managing the market risk efficiently.

As your investment time frame and goals change, so should your asset allocation. Therefore, be prepared to re-evaluate your asset allocation periodically. While asset allocation is important, it is essential to select the most appropriate investment options. The key considerations while selecting the instruments have to be flexibility, transparency, tax efficiency and liquidity. Above all, the key is to get started.