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The global turmoil has left everyone clueless. And unlike stock markets crash seen in the past, this downside has touched everyone's life. Right from a global investment banker at Lehman who is directly impacted to a housewife whose daily expenses have shot up due to high inflation and growing commodity prices. The first question which comes to mind is whether my investments are safe? Certain investments carry risk as an inherent nature. Investments in stocks, real estate, equity MFs carry the risk of credit, where principal can also be eroded but if they perform, returns can compensate the risk of erosion of capital.
This has been the case over the past few years. Right from 2004 there has been a bull run and the returns have been 30-40% per annum. This continued till the third week of January 2008 and barring few hiccups it was a vertical climb for the market. But then over the next eight months and one week, markets have seen an absolute downside of 40% from its peak. That's equity markets for you. While this cannot be said for the physical real estate assets but their companies' stocks performance have been one of the worst performers. The downside on an average has been around 60% in absolute terms.
Earlier markets were behaving more like a donkey's market. You hit a dart anywhere and you will make money. The concepts of making money through proper financial planning were put to sword and people with no or low risk appetite were putting money in the market. The same was the case with investors having low-risk or norisk capacity.
This was getting dangerous and as someone said when you start hearing from your driver that he also wants to put money in equity market to make fast short-term money...something is seriously wrong with the market. The debate is not that whether the markets should not have fallen or when it would rise. The key question which comes out of this did you follow the principals of financial planning?.
Have you followed the principal of regular investment? SIP (systematic investment planning) is one way where you can ensure that you are investing regularly. It is a very simple method whereby you invest a fixed sum of money every month and based on the value you end up buying a fixed number of units. You buy more when markets are low and less when markets are high. Besides this being the correct way of investment, it also brings discipline in your investment. This means you will end up buying more units in the current market scenario for every rupee invested. Did you also follow the principal of asset allocation—how much money you should be putting in risk assets like equity and real estate?
Every investor has their own risk capacity and appetite. But as a thumb rule you need to reduce your age from 100 to determine your equity exposure. Right asset mix ensures profits
Normally an Indian investor doesn't consider real estate as a risk asset. There is a belief typically true for Indian markets that real estate prices cannot fall.
What they tend to forget is when they do the real estate investment they are actually following the principal of longterm investment. This is very crucial for any investment as the probability of losing capital reduces with long term. Higher your holding period, the lower the risk of losing capital.This same principal gets very easily forgotten when it comes to equity. The main reason being the asset value can be seen on a daily basis in equity unlike real estate.
In current market scenario, there are concerns even on safety aspects of other asset classes of debt. But in general these have the credit safety as they assure a fixed rate of interest. PPF, fixed deposits, government bonds are the few fixed interest rate products. These products make sure your principal is protected.
Following these basic principals will ensure checks and safeguards. This global turmoil while impacting all, the severance would have been lower where proper care is taken during asset allocation as the loss would have been limited. It will not guarantee your capital protection but will give you assurance that with the right asset mix and strategy your assets will grow over a period time.
You need to see the bigger picture that is your financial needs and how best you can attain them. And by following the simple rule of investments...you should not go wrong. As sometimes...being simple is the best strategy.
(The writer is a certified financial planner and works
with Asset Managers Private Wealth Management)
This has been the case over the past few years. Right from 2004 there has been a bull run and the returns have been 30-40% per annum. This continued till the third week of January 2008 and barring few hiccups it was a vertical climb for the market. But then over the next eight months and one week, markets have seen an absolute downside of 40% from its peak. That's equity markets for you. While this cannot be said for the physical real estate assets but their companies' stocks performance have been one of the worst performers. The downside on an average has been around 60% in absolute terms.
Earlier markets were behaving more like a donkey's market. You hit a dart anywhere and you will make money. The concepts of making money through proper financial planning were put to sword and people with no or low risk appetite were putting money in the market. The same was the case with investors having low-risk or norisk capacity.
This was getting dangerous and as someone said when you start hearing from your driver that he also wants to put money in equity market to make fast short-term money...something is seriously wrong with the market. The debate is not that whether the markets should not have fallen or when it would rise. The key question which comes out of this did you follow the principals of financial planning?.
Have you followed the principal of regular investment? SIP (systematic investment planning) is one way where you can ensure that you are investing regularly. It is a very simple method whereby you invest a fixed sum of money every month and based on the value you end up buying a fixed number of units. You buy more when markets are low and less when markets are high. Besides this being the correct way of investment, it also brings discipline in your investment. This means you will end up buying more units in the current market scenario for every rupee invested. Did you also follow the principal of asset allocation—how much money you should be putting in risk assets like equity and real estate?
Every investor has their own risk capacity and appetite. But as a thumb rule you need to reduce your age from 100 to determine your equity exposure. Right asset mix ensures profits
Normally an Indian investor doesn't consider real estate as a risk asset. There is a belief typically true for Indian markets that real estate prices cannot fall.
What they tend to forget is when they do the real estate investment they are actually following the principal of longterm investment. This is very crucial for any investment as the probability of losing capital reduces with long term. Higher your holding period, the lower the risk of losing capital.This same principal gets very easily forgotten when it comes to equity. The main reason being the asset value can be seen on a daily basis in equity unlike real estate.
In current market scenario, there are concerns even on safety aspects of other asset classes of debt. But in general these have the credit safety as they assure a fixed rate of interest. PPF, fixed deposits, government bonds are the few fixed interest rate products. These products make sure your principal is protected.
Following these basic principals will ensure checks and safeguards. This global turmoil while impacting all, the severance would have been lower where proper care is taken during asset allocation as the loss would have been limited. It will not guarantee your capital protection but will give you assurance that with the right asset mix and strategy your assets will grow over a period time.
You need to see the bigger picture that is your financial needs and how best you can attain them. And by following the simple rule of investments...you should not go wrong. As sometimes...being simple is the best strategy.
(The writer is a certified financial planner and works
with Asset Managers Private Wealth Management)
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