Simple steps to reduce the risk in your investment portfolio
If you’re worried about losing money in the short term, you’re not aggressive at all. And even if your risk appetite is higher, there is no point in holding risky investments unnecessarily when a balanced portfolio with the right focus can help you achieve all of your goals in a timely manner.
So, if your portfolio becomes too risky, Aditi Khandelwal, Certified Financial Planner and Internal Influencer at Jupiter, says, “The first thing you need to do is write down all the investments you’ve made so far on one page. In another, write down your goals and the investments you intend to pursue. “
For example, you might have 60% to 70% direct exposure to stocks, but you don’t feel comfortable with that. Then you have to analyze how to liquidate and diversify the portfolio.
However, in most cases, the investor may need professional help for this, says Khandelwal.
Liquidate risky assets:
It’s a bit tricky, says Amit Trivedi, personal finance coach, speaker and author of Riding the Roller Coaster, adding that retail investors still don’t know which ones to sell / hold.
To solve this dilemma, he says, take a close look at all the components of the wallet. Then, sell the components you least understand the least first. For example, if you don’t understand the pharmaceutical industry, but have such stocks in your portfolio, sell them first. Even after that, if your portfolio is riskier than you can afford, sell the risky components as per your understanding.
Liquidity is essential. It offers you protection against a drop or loss of income. Other than that, Khandelwal says, make sure your emergency fund and insurance are in the right place.
Asset allocation according to the investment horizon:
An asset allocation strategy should be determined based on your age, investment goals and risk tolerance. “As a result, you can divide the portfolio into – 3 or 4 components – depending on the time horizon. Something that is short term has to be in lower risk assets, so investing for medium term goals should be slightly riskier than short term ones, ”Trivedi adds.
However, it is worth taking high risks if you are investing for the long term. Explaining through the rules of composition, Kalpen Parekh, MD and CEO, DSP Mutual Funds, says, the formula for wealth is A = P * (1 + r) ^ time. Mathematically, time is an exponential variable among P (principal) and R (rate of return). Therefore, the longer the time, the greater the impact.
“For example, our oldest fund in over 24 years has returned 20%. Its compound returns are therefore not 24 x 20% = 480%. It’s actually 8000%. This is the reason why investing has to be for the long term to really make money, ”he adds. Simply, the power of capitalization.
Diversification of investments:
Along with asset allocation, it’s just as important to diversify your investments. “And good diversification is investing in asset classes that aren’t moving in the same direction,” Parekh says. When investing, a low correlation indicates that there are not two asset classes moving in the same direction. falls, losses from underperforming investments are mitigated by gains from higher performing investments, ”Kalpen adds. Thus, the gains of the combined portfolio seem greater than their mathematical average.
Now, diversification needs to be done on a different level, Trivedi adds, adding that you need to diversify between companies through your portfolio of stocks and bonds. Second, within equity and bond portfolios, you need to diversify across all sectors. Then you diversify across categories, like stocks, bonds, commodities, etc. In addition, there is international diversification.
Review your financial plan:
When you have completed the asset allocation and diversification exercise, next comes the review part. Over time, any long term goal will turn into a medium term goal and then it will turn into a short term goal. As the investor gets closer to the target, the risk profile determined for that particular target should be adjusted appropriately.
“Portfolio monitoring is part of the financial plan review process. You examine the portfolio to see whether or not it still matches the development of your investment situation. If your situation has changed, your portfolio should be changed accordingly, ”says Trivedi.
Your wallet should be monitored at least twice a year, Khandelwal adds, also when you’re spending a lot.
A prudent approach to investing is to start with low risk and then increase the risk. “If his or her life goals can be achieved by keeping money in a savings account, then he / she should only do it that way. But unfortunately, we don’t have that luxury, so we have to take risks in investments, ”Trivedi concludes. But make sure these risks are calculated.
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