Investing in simple but not easy. We are often in a dilemma as to what approach to adopt for investing. An average investor on the street is likely to be direction-less about investing and would not likely have any clue as to the purpose or goal of investing. What is needed is a simple approach which we can easily understand & follow while managing our investments. While there can be many different approaches that can be adopted given the different situations or purposes of investment, we present one approach that can stand true for most investors.
THE INVESTMENT APPROACH :
An investment approach has to be relevant and reliable for investors at different times and different financial conditions. It should take into consideration the financial objectives of an average investor into consideration. The attached image represents one such approach to investing that can be followed in our investments. The following are the key elements that form a part of this approach.
LONG TERM GOALS :
The long term goals or funding needs of an investor should be at the heart of any investment planning. There are quite a few long term goals which we see in our lives. Goals like education and marriage for children, purchase of home and car and retirement for self and spouse are the goals that must be in focus. Depending on the family priorities, other goals can also be taken into consideration.
As a first step, we should identify our long term goals by quantifying amount needed, time horizon and savings potential. Accordingly, we should invest in assets that give us the best possible wealth creation opportunity in long-term so that we can achieve our goals.
RISK APPETITE:
After accounting for your long term goals, the next element is identifying your risk appetite or your ability to take risks in investments. For eg., the risk appetite for a 25 year old and a retired person differs largely. Note that we are talking about risk appetite after planning for long term goals because one, we cannot afford to compromise on our life goals and secondly, the risk from equities reduces and returns are more predicable in long term than short term. A person's risk appetite can be identified, for the sake of simplicity, as aggressive or moderate or conservative. This would take into account your financial ability and your mental appetite to take risks and bear losses. This input will be important for identifying asset classes for ongoing /regular investments which are not directly linked to any goals in life.
REGULAR INVESTMENTS :
Ongoing or regular investments are generally of short to medium term time horizon and not linked to any life goals. There are three things you should keep in mind for these investments which will continue during your entire life...
1. Liquidity: At least some part of your investments must be liquid enough so that when you need any money, you are not helpless. Financial planners often talk of an Emergency Fund to be kept which can be equivalent of 3 to 6 months of your household expenses to tide over any emergency situation. Further, for investment purposes, it is recommended that money should be put in avenues that are liquid in nature rather than physical like property and precious metals. This will provide more safety, transparency and control while saving storage and maintenance costs.
2. Asset Mix: While making regular investments you should consider your risk appetite and then identify a proper mix of different asset classes and also the underlying products. You may also design your asset and product mix keeping your tax planing in mind or as per your other financial objectives. Having a proper coverage of your assets is very important before we actually talk about arriving at an asset mix. Most of the time, we ignore to consider physical investments and investments into debt products like PPF, Post office small savings, etc. while arriving at our asset mix. An asset mix has to consider all such assets to be meaningful for you. improvement in your investment plans.
CONCLUSION :
Planning for long-term goals should be at the starting point of our investments and also at the heart of it till we do not exhaust all our long-term goals, including retirement and inheritance. Only after planning for those responsibilities can we look forward to making investments as per our risk appetite and for meeting other general financial objectives. Our investment approach should be centered around these pillars to ensure successful investment outcomes. To begin with, let us first try and remember the image of the investment approach we just read about.
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