Good investment strategy is the key to achieve your
financial goals. This can be done by minimizing risks and thereby maximizing
returns. Risks can be minimized by diversifying your investments. In simpler
terms it means `do not put all your eggs in one basket’. Your investments
should not be focused on just one asset class. It should be allocated
strategically in different asset classes. Diversified portfolios are proven to
have reduced losses in events such as economic crisis or bearish stock market.
When you diversify assets, any downward movement in one
class of asset is offset by growth in another class of asset. It is unlikely
that all different types of assets will grow or decline at the same time. Each
asset has its own benefit and by diversifying you get the advantage that they
have to offer. The various asset classes are cash, stocks, gold, fixed deposit,
real estate, provident fund, mutual fund and so on. These can be classified
into aggressive, balanced and conservative assets. One can also further optimize
your portfolio by diversifying within each investment class. For example, when
investing in mutual fund, you can investment different funds such as small, mid
and large cap rather than investing in only one fund.
Diversification of asset will depend on your age, financial
goals, amount of investment, timeline and your risk appetite. An ideal
investment portfolio should have mix of aggressive, balanced and conservative
allocation. When you are younger, you can have increased exposure to riskier
investment such as equities. These have higher earning potential but it can
take longer to give expected returns. There is also need to have balanced
assets which are mix of aggressive and conservative assets. Lastly, some
allocation has to be done in conservative assets. These are considered safe
investment avenues but have lower earnings potential. Liquidity is another
aspect that you need to consider while choosing your investments as you never
know when you will be in need of funds.
The thumb rule for asset allocation says that `100 minus
your age’ is the percentage you need to allocate in equities and the rest in
debt and cash. However, everyone’s needs are different and allocation should be
done accordingly. A high exposure to equity may give you good returns but
increase your losses if the market turns bearish. On the other hand, a
conservative investment will be a safe option but it will not have the
potential to meet your future needs. Thus, allocation will need to have a good
mix of aggressive and conservative investments.
Once you have created a well balanced portfolio based on
your needs you can stop worrying about your investments and let your money work
for you. You will still need to monitor your portfolio occasionally. You should
refrain from constantly adding or removing different assets. As you age, you
can shift your preference towards a more conservative portfolio. Do keep in
mind not to over-diversify.
