Are you worried about market volatility due to the elections and beyond? You can easily reduce portfolio risk with these simple steps we refer to as goal-based risk management – a combination of passive, systematic investing and active risk reduction.
If implemented sequentially, these steps would result in greater focus and success. You can automate most of these steps and create a start-to-finish financial plan with the freefincal robo advisor tool.
- Understand when you need the money. If you are unclear, you can only save, not invest.
- Know when to invest in what asset class: equity, fixed-income gold, etc. We recommend zero per cent equity for up to five-year investment durations, About 20%-25% for up to 10-year durations, and 50-60% beyond that. The rest is to be invested in fixed income. There is no need for gold or real estate (as an investment).
- Have reasonable post-tax return expectations from each asset class. For example, expecting 18% from equity is silly, no matter how long the investment duration is and how good the portfolio management is. We recommend 10% post-tax from equity and 6% post-tax from fixed-income. These expectations should only be revised downwards in future!
- Choose the right asset allocation. This means deciding to hold X% or Y% of equity so that (a) you can tolerate the volatility and (b) the amount of money to be invested for this asset allocation is possible and manageable (including future increase investment).
- Rebalance your portfolio once a year, every year. Market volatility will increase or decrease the portfolio’s equity/fixed income percentage holding. Rebalancing is a way to reset the asset allocation to the desired one. See this video for more details
6. Change your asset allocation in a step-wise manner. Many people say unsubstantiated things like “reduce equity in the last three years, before you need money” and so on. You need to reduce equity a lot sooner!
Long term investors must have a solid systematic risk management plan by gradually de-risking their equity exposure. Our research – explained in the goal-based portfolio management course and incorporated into the freefincal robo advisor – shows that this has more than a reasonable chance of success regardless of market conditions. This is also explained here: do not expect returns from mutual fund SIPs! Do this instead!
Also, watch this to find out how and why it works.
7. Shift focus from returns to the target corpus. Too much time and effort get wasted on worrying about returns. It is a lot easier if investors focus on the target corpus. This is a variable target due to inflation and other logistics. So, each year, we need to redo the goal planning calculation.
So, we need to know how much the current corpus is worth each year. That is if it is 10% or 20% of the current target, etc. This clarifies where we are and what further needs to be done.
Using this method, I have gradually increased my fixed income assets close to the current target corpus for my son’s education. This allows me peace of mind and allows me to ignore market turbulence.
That is it! These goal-based risk management steps should help you fight market volatility associated with elections and other event-based fears. The only problem is, are you disciplined and focused enough to follow it? Or will you take what “experts” on Twitter, YouTube, and TV say?
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About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
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