Investment Success Comes With Discipline

A goal-based investment process, with a clearly defined time horizon and a disciplined investment strategy, holds the key to how successfully you can achieve your investment goals over varied time horizons. However, keeping the investment process on track can be a tough task as one has to encounter numerous challenges right from the time of establishing goals to the completion of the time horizon. During this process, maintaining asset allocation determines the potential returns and the attendant risks, whereas rebalancing and effective monitoring are crucial from the point of view of keeping your investments on track. 

Here is how you can counter these challenges successfully 

Stay committed to your time horizon — While volatility is a natural phenomenon in the marketplace, short-term fluctuations tend to smooth out over time. Therefore, it is important not to allow market volatility to influence your long-term investment strategy. Simply put, a haphazard approach to realign the portfolio amidst short-term volatility can backfire. A disciplined approach is the perfect way to not only reduce the impact of volatility on your portfolio but also to benefit from ‘averaging’ over time. Moreover, it keeps emotions away from your decision-making process, and that goes a long way in keeping you committed to your defined time horizon. 

Balance risk and reward — One of the most crucial factors that determines the level of investment success you can achieve is effective balancing of risk and reward. Therefore, you need to identify your risk tolerance level and ascertain a suitable asset allocation. The right way to decide asset allocation is by aligning it with your time horizon. For example, Equity Funds require you to have the risk appetite to withstand market volatility as well as a long-term time horizon. Therefore, equity should be the mainstay of your portfolio for long-term goals like building a corpus for children’s education and retirement planning. However, as you get closer to the completion of the time horizon, rebalance your portfolio gradually to protect gains as well as make it suitable for the changed role, i.e., from accumulation to disbursal in the case of retirement planning. 

Keep your portfolio compact — Monitoring the progress of the portfolio is as important as making the right selection. Therefore, you must build a compact portfolio without compromising the level of diversification. Remember, over-diversification is generally the result of following a haphazard approach. Mutual Funds are an effective way of achieving the right level of diversification by investing in carefully selected funds. 

It is also important to analyse the performance of the funds properly to avoid making any abrupt decision. The right way is to analyse their performance vis-a-vis the benchmarks and the peer group. Remember, even the most consistent fund managers are likely to deliver negative returns when the markets correct. 

Therefore, short-term negative returns, in line with the market, from a fund that has been doing well for years, do not warrant any reaction. Similarly, even a poorly performing fund could give decent returns when the markets are doing well. Also, the impressive returns may be due to the aggressive investment strategy of the fund manager, and that may expose you to higher risk than your accepted level. 

Similarly, it is quite common to see investors getting tempted to make changes in their portfolio based on certain news or events. While some of these may require you to realign the portfolio a bit, making large-scale haphazard changes can be counter-productive. Therefore, try to select funds that provide the flexibility to fund managers to rebalance the portfolio, if and when needed. 

Rebalancing, on your own, can be tough at times as it may involve redeeming in a rising market or making fresh allocations in a falling market. However, the truth is that rebalancing imposes discipline and ensures that your portfolio mix does not take you beyond your defined risk profile.