The old adage “don’t put all your eggs in one basket” certainly applies to all investors big and small.
The markets are usually very dynamic and it is impossible to predict the exact movement of the indexes. In such conditions, diversified portfolio plays an important role in minimizing the risks and maximizing the profits.
First, set aside enough money in cash and income investments to handle emergencies and near-term goals.
Spreading out the investments
Investors should invest in the equities as they provide great returns, however it is strictly advised to not put all of your money in the investments of one stock or specified sector. It is good to make the investments in the companies you know well or whose goods and services you use.
Invest in Index or Bond Funds
As an investor you should consider adding fixed-income funds or index funds to your portfolio. One of the excellent ways for long-term diversification investment is to invest in securities that track various indexes. Another way of further hedging your portfolio against market uncertainties is to add some fixed-income investment options, like bonds, corporate FDs.
Continue Building your portfolio
It is important to keep adding investments on a standard regular basis and grow your portfolio. One should avoid investing the Lump-sum amount in volatile or uncertain market conditions. This strategy of investing helps in smoothing out the peaks and valleys produced by volatile market conditions. Thus, as an investor, one should invest money regularly into a specified portfolio of funds/stocks.
Aware of the time to Exit
It is mandatory for a smart investor to know when to exit the market. Some of the sound strategies of managing portfolios are rupee – cost averaging, purchasing, and holding. One should not ignore the fact that time to exit the market is very crucial for remaining in tune with market conditions and staying current with the market investments. One should know the current happenings in the companies you have invested in.
5. Seek a professional:
Getting the right mix depends on your age and retirement goals, in addition to understanding your objectives, time horizon and risk tolerance. Contact an investment professional with proper qualifications education and experience.
Asset Allocation Calculator
This tool will suggest an asset allocation for you across different asset classes based on your level of risk capacity and risk tolerance.
The Asset Allocation Calculator is designed to help create a balanced portfolio of investments. Age, ability to tolerate risk, and several other factors are used to calculate a desirable mix of stocks, bonds and cash. The asset allocation calculator is a great place to start the analysis in building a balanced portfolio.
Rita is aged 30yrs and Mr Gupta is aged 50yrs old.
Gold and cash become important to counter inflation and provide liquidity at times of emergencies.
The above asset allocation is only indicative and can vary with personal circumstances, needs, liquidity requirements and goals.
Other forms of asset allocation also include investing in metals, commodities, art, and foreign markets like Brazil China, Russia and Korea, that are resource rich economies.
Here is an example of a diversifies portfolio and its strategy:
Some good old time tested tips
First, here are five things to avoid:
Too many investments
Keep your holdings down to a manageable number of investments — as few as 20 and not more than 30 —in reasonable amounts (no outsized bets). Yes, the holdings should be diverse in the sense that the value of these funds or securities should not be tightly coupled with one another. Buying stock in 20 discount retailers will not diversify your portfolio; buying 20 stocks in different sectors and industries will. By the way, having fewer investments means having an easier time making sense of it all.
Diversifying based on market cap.
Small caps and large caps rise and fall together. Find strong businesses and invest in those regardless of what the total market cap is.
Buying illiquid and high-fee investments.
Avoid investing in close ended MFs or investments with a lock – in period. Also avoid too many MFs as they have fees to be paid while you stay invested and while exit.
You Can’t Diversify Your Way Out Of A Financial Hurricane
In bull markets, investors double dip their diversification, increasing fees with virtually no increase in diversification benefit. In bear markets, historical correlations break down and you end up losing on both the growth part of your portfolio and the “protection” part as well. Its important to know and time an exit from any portfolio.
Long-term exposure to commodities/ currencies
Commodities / currencies are to be traded, not owned. Never is there a successful commodity investor, but there can be nimble commodity traders who are just as comfortable in selling bear markets as buying bull markets. They spot opportunities and don’t feel compelled to be in all commodities / currencies all the time. Buying and holding these trading vehicles won’t build your wealth over the long term.
Life is a journey. It’s filled with many experiences: expected and unexpected. So, it makes sense that your portfolio strategy is flexible. To make the most of your investment plan you may want to talk with an investment professional for guidance.
For every major financial decision and whenever life impacts your wealth strategy goals. Likewise, whenever something happens in the market that affects your long-term strategy, that becomes an important part of the conversation.