Configure a Safety Setting for your Savings
Amar is a CFA Charterholder and CFP, having over 20 years of experience in IT and Financial Services. He is very passionate about spreading financial literacy and has authored four bestselling books on Personal Finance.
10 Oct, 2017
Most of us work hard for years to accumulate a healthy kitty for ourselves. But the actual work arises when it’s time to maintain, or rather better one’s portfolio. To do this, rebalancing the portfolio in favour of safer instruments is imperative. This will ensure that the portfolio is insulated from market risks and will have the opportunity to flourish.
Let’s take the case of Mayank Rathore, who in his fifties, is a seasoned investor. As a veteran, he has enjoyed the fruits of his successful investment strategies over the past few years. This has resulted in a good corpus for both, his family and the business venture. In fact, he is now in a financial situation where he can afford to look at “safety-first” instruments to park his wealth and retire.
The general trend dictates that the more you have of something, the more you want of it. And if your formula for achieving it has been successful, there’s all the more reason to continue using that formula to achieve the same success. This is especially true of those are in the business of creating their wealth through stock markets. They have an uncanny knack of continuing to play the game because the heady mix of picking the right option and making money off it consistently is not something successful investors can resist. And it is this behaviour pattern, that lands them in hot waters.
Mr. Rathore is no exception to this. Having had a good run in the stock market, Mayank is happy to continue investing in the bull market and earn fast cash. But if you were to ask him about his minimal investments in the market, his quick response is of not wanting to invest in equities for that long a period. The basic idea is to make money in the bull markets and to stay away from the market during the bearish phases.
By aggressively investing in future market, Mayank managed to build up to Rs. 10 crore by the 20th of January 2008 from Rs. 50 lakh in 2001. Even post this period, the entirety of his exposure was in future markets. In the next few days, however, the markets crashed and his portfolio was whittled down to Rs. 4 crore.
Seven years of astute stock picking and taking calculated risks had gone down the drain for Mr. Rathore. This isn’t an uncommon phenomenon and occurs when greed takes over and the investor’s focus shifts to simply maximizing returns. Often, a number of investors are not satisfied with getting decent returns and take the aggressive route. The bright lights of high returns blind these investors to the risks they are exposing their wealth to.
I often get asked what should be done once enough wealth has been accumulated to meet one’s goals. Well, the short explanation is, that for each stage of life, the answer to this question will differ. But the crucial thing is to put a number to it at some stage in life and then undertake the following measures.
- Make sure to avoid costly mistakes. Regardless of whether it is futures or commodity trading, stay away from risky offerings. In fact, it is best to stay away from trading, in general.
- Understand that equities is an asset class. Any promise of more than 15 per cent, based on past performance, should be approached with caution. This is because, higher the returns, greater the risk. However, taking into account the current market pessimism, one could end up earning higher returns of between 12 to 15 per cent BUT only in the long term.
- It is a good idea to begin with accumulating wealth in line with your goals, liquidity needs, current income and time horizon. Once that’s done, the next step is to balance your asset allocation by making a shift to instruments that might give lower returns but would also provide a guarantee of keeping your investments safe. This will ensure that even during turbulent times, you can be rest assured that your money is safe.
- Another important skill to master is being patient about the money you are playing the market with. When one is investing in equities, it is best to remember that downturns are a part and parcel of capital markets. So, while a 30 per cent slide is acceptable, once the drop crosses 50 per cent, it is time to re-evaluate your overall investment strategy.
- Limit high risk-high return transactions to only a small part of your portfolio. Even this should be done only in the event that you can deal effectively with market fluctuations.
For a lot of people, when the prize at the end might be higher returns, forgetting the pain felt from the last fall and approaching the new situation with renewed energy, is very easy. It is for these investors that appropriate asset allocation is a must prior to plunging into a new situation.
To avoid feeling disappointed, follow these two simple, yet cardinal rules:
- Make as few mistakes as possible.
- Control your greed and fear.
Because the success you experience isn’t simply about the investments, but is largely dependent on you. Rather than your investments, it is how you behave in the bullish and bearish markets that dictate how and where you will end up, several years from now.
If you want to know how your personality can affect your finances, check out our blog on ‘Don’t let your investments be a victim of your personality’.