Jan 21, 2014,16.34 IST
Consistency is key to investment success
It is a well known fact that consistency in one’s investment approach and philosophy is the key to investment success. In reality, however, investors often let their emotions dictate their investment decisions. Investing randomly into different asset classes without ascertaining their asset allocation, not following a disciplined approach to investing, exiting abruptly from an asset class and investing without a clear time horizon are some of the most apparent inconsistencies in their investment process. Investors must know that haphazard investment decisions can cause havoc with their ability to build long-term wealth.
Not surprisingly, it is equity portfolio that suffers the most from these inconsistencies. For example, every equity investor hopes to be suitability rewarded for the risk that he takes by investing in this volatile asset class. Therefore, he feels happy when the stock market does well. However, as soon as he is faced with vagaries of the stock market, the excitement often turns into a fear. This often leads to undue focus on short term performance with a high degree of aversion to losses. The resultant hurried exit often denies investors an opportunity to benefit from the long-term potential of this wonderful asset class.
Equity fund investors must remember that their portfolios will continue to get affected as long as the volatility in the stock market continues. Considering that volatility is a natural phenomenon of the stock market, they need to accept it and invest on an on-going basis to tackle it efficiently. It is equally important to ensure that the portfolio is not entirely dependent on the stock market’s moods. One of the ways to do this successfully is to follow an asset allocation strategy. Asset allocation allows an investor to allocate his investments into different asset classes like equity, debt and gold. By maintaining asset allocation at all times, one can take emotions out of one’s decision making process.
Here are a few steps that can remove inconsistencies from your investment process and help you in approaching your decision making process in a balanced way:
Remove ambiguity from investment process
While the right way to begin investing should be to have an investment plan and strategies to implement it in place, many of us invest our hard-earned money randomly. While sometimes we get tempted by the tips given by people around us, there are occasions when we get influenced by short term performance of an asset class. Besides, lack of discipline in our investment approach often compels us to compromise on our important investment goals.
Therefore, you must remember that investing is an on-going process, not a one-time activity. The right way to begin your investment process is by establishing goals that needs to be achieved over short, medium and long-term. Second, it is necessary to assess your current position in the financial lifecycle. Third, you must ascertain your risk profile as that decides how much risk you could take while investing. This is particularly important as different financial objectives require different investments.
Participate actively in the decision making process
It is always advisable to seek help of a professional advisor while investing your money. However, leaving everything to him may not be a smart strategy in the long run. It is important for you to participate actively in the decision making process. Remember, while an advisor can help you in terms of determining the course of action and selection of investment options, you yourself have an important role to play in defining the parameters. Moreover, a better understanding of complexities relating to investing will minimize the instances of abrupt investment decisions over time and save you from the possible damages to your wealth.
Rebalance your portfolio periodically
As an investor, you always face a dilemma of whether to hold on or sell your equity fund holdings during different market conditions. There is a general tendency to allow the portfolio to ride on when the stock market is doing well. Similarly, one often feels compelled to abandon equities during the market downturns forgetting that those are the best times to continue investing to benefit from “averaging”. Rebalancing the portfolio up or down can be the answer to your dilemmas.
Portfolio rebalancing is a process of bringing the different asset classes back into proper relationship following a significant move in one or more. It helps because rebalancing is more about managing risk than return. It is equally important to decide on a time interval, like once a year, and examine the portfolio.
No doubt, it is a tough decision to either redeem in a rising market or invest in a falling market. However, rebalancing imposes discipline and ensures that the portfolio remains diversified at all times. In a way, rebalancing ensures that you do not make any haphazard decisions by either exiting from an asset class or investing heavily into it with an aim to make a quick buck.
The author is a CEO at Wiseinvest Advisors. He can be reached at email@example.com
Planning to invest in mutual funds? Here's help
Here are a few fund options to invest your money