Don’t Allow Your Investments To Go Off Track

One of the challenges for investors is to keep their portfolios on track through their defined time horizon. The current market situation with heightened volatility can test the patience and perseverance of investors. However, history tells us that investors who stay invested during turbulent times in the market get their due in the long run. In other words, a haphazard approach of either abandoning the pre-decided asset allocation or investing in equities to make a quick buck can be risky. The key, therefore, is to continue with your investment process without interruption and ensure that certain basic principles of mutual fund investing are followed diligently. [EasyDNNnews:PaidContentStart]

First, keep your focus on long-term performance. While it is natural to get affected by the short and | or medium-term performance of the stock market, it shouldn’t influence your long-term investment strategy. Remember, volatility in the stock market is a natural phenomenon and hence you must be prepared to tackle it at all times. Fortunately, there are strategies like a disciplined investment approach and staying invested for a longer term that can not only help you tackle volatility but also allow you to benefit from it through averaging. 

Further, keep your asset allocation intact. If you want to be a successful investor, you must make asset allocation an integral part of your investment process. The type of asset allocation strategy that can work best for you would depend largely on your ability to tolerate the risk and time horizon. Risk tolerance is your ability and willingness to take risks in order to achieve higher potential returns. Therefore, if you have a high-risk tolerance, you will have the capacity to take market volatility in your stride to enhance your chances of earning higher returns. On the other hand, if you are a conservative investor, you would prefer investment options that will preserve your capital. 

Moreover, you need to be aware of the different risks associated with investing your money to be able to tackle them effectively. Some of these are:

■ Market Risk - This is the risk that the portfolio value will fall due to fluctuations in the securities prices. Diversification helps in managing risk in the portfolio. There are different ways to diversify the portfolio such as by investing in different asset classes, sectors, market capitalisation as well as geographically. Another important strategy to manage risk is to rebalance the portfolio periodically. This allows you to buy low and sell high in a disciplined manner. 
■ Inflation Risk - This is the risk of losses resulting from the erosion of an income or in the value of assets due to the rising costs of goods and services. It is one of the major risks for those investors who mainly invest in debt and debt-related securities.
■ Longevity Risk - An investor might outlive his assets. Hence, it is absolutely necessary to design a portfolio that has the potential to provide a positive real rate of return over time.
■ Behavioural Risk - It is a well-known fact that uncertainty is a natural part of investing. However, many investors do not act in their own best interest when faced with uncertainties. This causes a substantial impact on their investment results in the long run. Therefore, the key is to stick to one’s investment plan irrespective of the market condition.
■ Sequence Risk - Although having a financial plan and following it in a disciplined manner helps, one can still have the misfortune of experiencing a market downturn just around the completion of one’s time horizon. Therefore, it pays to start protecting gains by altering asset allocation of the long-term goals in a phased manner of say around 12-18 months before the target date. 

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