The process of investing starts with you and not with any other external factor. Often investors spend lot of time trying to decipher the impact of market movement on their investment decisions without understanding their own needs. Each person is different and so are the wants and the desires. Irrational reaction to market movements can lead to unpleasant investment experience.
To have money in your hand every month does not guarantee you the lifestyle you anticipate throughout your life. Circumstances and needs always keep changing.
Today’s sound financial situation does not necessarily foretell an equally rosy future. You need to plan and manage your current income and your future income according to your needs.
These needs are your goals, your dreams. Planning and achieving your financial goals will provide you pleasant investment experience and not beating the market.
Although each person is different and has different aspirations but to begin with, you can start by bucketing your financial goals into three broad categories: safety, market and aspirational.
Safety needs
At a minimum, you must protect yourself from the anxiety of a dramatic decrease in your current standard of living.
Thus, you must immunize yourself from personal risk: the devastating impact of not being able to meet your essential cash needs, regardless of the performance of financial markets. Essentials are those requirements that you may have to meet regardless of your good or bad financial situation.
You must maintain sufficient liquidity to meet your living expenses for at least six months. However, if you are an entrepreneur, you must maintain liquidity to meet at least one year of living expenses.
You need a portfolio that protects your capital and provides a return that is little more than the inflation. Liquid mutual funds, short term government of India bonds and fixed deposits should ideally form a major part of your ‘safety’ portfolio.
Market needs
You may want to maintain your lifestyle by earning a rate of return that is comparable to the market return. Planning for your own retirement, your child’s foreign education, buying your first home etc. are usually your goals that require long-term investing.
Ideally you should invest in ‘market’ portfolio with a time horizon of more than seven years. Since these are not your basic needs, you can plan to invest in instruments that can provide you market exposure.
However, you cannot afford to take excessive level of portfolio risk. A diversified portfolio of equity and bonds is a reasonable investment. Some of the options could be index based ETFs or index mutual funds.
Such a portfolio is expected to deliver a return that is closer to the market return. Since the investments are exposed to market, this portfolio will have a market risk.
There maybe short term volatility in your ‘market’ portfolio but over a long period of time, volatility reduces.
Aspirational needs
Aspirational goals are motivated by the observation that sizable wealth creation requires higher level of risk.
These investments can exponentially increase your wealth or there may even be a possibility of loss of principal. Investment options for aspirational portfolio may include direct equity, commodity investment, early stage angel investing, real estate investment, hedge funds or even private equity.
It isn’t that tricky
The process of investing starts with you and not with any other external factor.
Often investors spend lot of time trying to decipher the impact of market movement on their investment decisions without understanding their own needs. Each person is different and so are the wants and the desires.
Irrational reaction to market movements can lead to unpleasant investment experience.
(The writer is Founder of ankurkapur.in - an investment advisory and management firm)