If you are an investor (most of us aspire to be), you need to learn how to invest. The problem with most of us is that we are investors part time and run shy of the learning when it comes to investing. Yet, at the end of the day or rather at the end of your active life, it is your investment that will support you, keep you from stepping down the pace of living. So, it is as important to learn how to invest, as it is to learn how to cross a busy road without damaging yourself.
Let us begin with a home question. What do you think is the most effective way to invest?
1. Timing the market
2. Staying with the investments long term
3. Asset allocation
4. None of the above
While timing the market and staying with investments long term are important, it is asset allocation that will ensure growth over a period of time. If you have said “Asset allocation”, that is the way to go!
Asset allocation is the process of dividing your investments into various asset classes. While this term is generally used with reference to investments in the stock market, the term can be applied more broadly to cover the process of spreading your investments into different asset classes across the board–paper assets, immovable property, gold and so on. Within each class too, you must spread your assets into different asset categories.
For instance if you are investing in the stock market, your assets could be invested in equity, debentures and bonds. Equity investments in turn, should be spread over the several categories–real estate, pharma, oil, education, finance and so on… In other words, you keep drilling down till you have a portfolio that is diverse and the downside risk is reduced. A fall in one industry will not wipe out your portfolio!
How does one determine the mix of assets? The decision is a very personal one and is determined by
a) the amount of money you are willing to invest;
b) what your financial goals are.
Risk averse investors may consider real estate or mutual funds a safe route. Either investment type, offers convinient and cost effective ways of managing your assets with mimimum risk. Further, if you look at the types of mutual funds available for investment you will find that there are a range of products and time horizons for you to choose from and create a diversified portfolio. In real estate too, you can invest in land, house property or commercial property. You can invest long term or short term. You can choose the level of risk you want to have and so on. ..
Risk ready investors, can play the secondary market with short term or long term goals.
However, neither the amount of money you are willing to invest and your financial goals remain constant. They change over a period of time. It follows that asset allocation should also keep pace with your changing needs. So, you need to periodically review your portfolio and determine whether the asset allocation is just right for you at that point in time. You may have an addition to your family or you may be aging and your risk taking ability may have reduced for a variety of reasons. You need to adjust your portfolio to synchronize with the changes in your life.
To conclude, you need to find the right balance for yourself. You need to learn which investment suits you the best at a given point in time.
