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Start investing early but don’t be childish about it

LiveMint logoLiveMint 30-03-2017 Sunita Abraham

You may think you have done your bit to meet your needs in the future by saving and investing. But you may still find yourself with inadequate funds to meet the goals, or unable to access the funds when you need them, or holding a portfolio that is too risky for your comfort. Any and all of these disasters could confront you if you make any of these mistakes while building and managing your portfolio.

If you don’t identify your goals clearly, you will not know how much money you need for your goal and for how long you have to accumulate the corpus. These two factors, in turn, define how much you need to apportion from your current savings for the goal and how the money may be invested.

If the goal is well into the future, you can look at growth assets like equity to take advantage of higher returns. Saving for near-term goals will be in investments with steady, albeit lower, returns. If your investments are not aligned to goals, your corpus may fall short of your needs. Or, you may have to sell at a loss or bear a cost to redeem when you need the funds.

This does not mean that you should start saving only when your goals are clear. Start saving and investing as early as possible. When your goals become clear, assign the investments to those goals.

Invest the savings regularly without trying to time the entry into investments. Your funds will remain idle if you wait for markets to bottom out and there is also the risk that prices will start rising before you spot the bottom. Similarly, waiting for asset prices to peak to exit an investment may again be difficult to time.

A better plan would be to redeem investments over a period of time, aligned to your need for funds.

Chasing the best-performing asset class will result in a portfolio that is risky and not aligned to your goals. If the portfolio is concentrated in only one asset class, say debt, you will not benefit from the opportunities arising in other asset classes such as equity or commodities.

Select investments based on consistent long-term performance rather than chasing last year’s best performer. Else, You could just end up incurring costs and taxes moving funds in and out of investments. Avoid the risk of too much or too little diversification. But over-diversification may mean that there is a lot of duplication in your portfolio and you may be holding on to losers because you are not able to track all your holdings. Or, you may be holding all your money in one or a few investments which makes your portfolio’s returns highly sensitive to the performance of each investment. If you look closely you will be able to identify gaps in your portfolio which can be corrected by diversification.

A change in goals and needs will imply a change in the asset allocation in the portfolio. If these alterations are not made, then the portfolio will no longer be in sync with your needs and your goals may be at risk. Even if the goals have not changed, the performance of different asset classes may have led the portfolio to drift away from the allocation that is most suitable for you. For example, a run-up in equity markets would push up the percentage of equity in the portfolio. This will make the portfolio riskier than what you may be comfortable with. It is important to bring back the portfolio allocations to what is aligned to your needs. You also need to review the performance of the investments to help weed out consistent under-performers, which may be pulling down the portfolio’s returns.

Most portfolios suffer from neglect. Cash may be left to accumulate in low-earning savings accounts. Portfolios may not be reviewed for performance and allowed to move away from the preferred allocation to different asset classes. Investment decisions may be driven by emotions rather than financial rationale. One way to avoid slipping up is to have processes to take care of these activities. Sign-up for automatic investment plans, where available, so that the investible surpluses do not remain idle. Have a clear process for identifying, evaluating and selecting investments. Set up a review and rebalancing schedule and build the discipline to stick to it to make investment and exit decisions.

Your saving and investing activity should always be driven by your goals. If you know what to watch out for then it may be easier to protect your portfolio from their effects. It may also be a good idea to use the services of an advisor to help you in managing your portfolio. While there is a cost attached to the service, in the long run the benefits may far outweigh the costs.

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