Tough times call for tough decisions! Well for us, it is about utilizing our time at home as much as possible and evaluating the action plan what to do now! With COVID 19, the world financial markets are also giving investors quite a scare. While we are all sitting at home and doing our bit to avoid the spread of COVID 19, we at Wealth Cafe decided to share more information on what you as an investor could do to manage your money better.
‘Investing is not about avoiding the risk but managing the risk to make maximum returns possible’
Investing Rule 101 – High Risk = High Returns & Low Risk = Low Returns
Never forget the Rule of Investing.
Only after you have understood and digested this fundamental Rule of Investing that you should read further.
How should you Invest?
– Know your Risk Profile (How much risk can you bear)
– Invest in financial products that match your risk appetite by doing Asset Allocation
How to do Asset Allocation?
– We have attached the asset allocation table based on your Risk profile to help you understand how much you should be investing in debt & equity. Further, we believe that you all remember the Risk profile Questionnaire you took in the Workshop.
– A simpler method is to use your age to determine your asset allocation. If you are in the age bracket of 25- 35 years, invest 30% in Debt and 70% (100 – 30) in Equity. The rationale here is that the younger you are the more risk you can take as you would have a longer investment horizon and have a higher risk-taking appetite. While this appears to be a simple method, this is a crude method and risk profiling is the best way to arrive at your personal risk profile.
Once you have determined your investments into Debt: Equity-based your Risk profile. Ensure that you maintain your Asset Allocation Ratio.
This is how you begin your investing journey.
Now, given the current volatile markets, if after a month, Equity falls further down (which we are not sure of!), you must do Asset Allocation again.
This action of checking your investments and selling/buying as per your asset allocation is known as re-balancing your portfolio.
How often should you re-allocate/re-balance your portfolio?
You must re-balance your portfolio where your asset allocation varies by more than 5% from the desired Asset Allocation ratio.
How does this help?
By sticking to this rule-based allocation, all sentiment-based investments can be kept aside and you end up buying equities when they are cheap and selling them when they are expensive.