It is common knowledge that one’s asset allocation should be determined by one’s risk appetite. An investor who invested in the stock market when Sensex was at 21,000, would have thought that he is unfortunate or that share market is not for him and would have pulled out all the invested money when the sensex was below 10k, losing almost 90% of the capital.
Those who do not understand business logic or are afraid to take risk or simply not interested in stock markets would prefer a PSU bank FD at 5%, insurance policies, and any other government securities. All these investments would hardly fetch 8-12% pa whereas the inflation growth itself is 4-5%, thus leaving very little profits. Also the change in lifestyle attributes to the higher expenses & your investments look small when you do the analysis. One needs to understand simple logic of economics that the growing economy leads to higher inflation & improved lifestyle.
However, the general formula of investing is that you should invest (100-your age) %, (upto the age of 40 years) of your investible money in high risk – high return financial instruments such as equities or realty or any other business.
However, before taking risk, one should gauge their risk appetite on the following basis:
Those who do not understand business logic or are afraid to take risk or simply not interested in stock markets would prefer a PSU bank FD at 5%, insurance policies, and any other government securities. All these investments would hardly fetch 8-12% pa whereas the inflation growth itself is 4-5%, thus leaving very little profits. Also the change in lifestyle attributes to the higher expenses & your investments look small when you do the analysis. One needs to understand simple logic of economics that the growing economy leads to higher inflation & improved lifestyle.
However, the general formula of investing is that you should invest (100-your age) %, (upto the age of 40 years) of your investible money in high risk – high return financial instruments such as equities or realty or any other business.
However, before taking risk, one should gauge their risk appetite on the following basis:
*Income level & security of income flow.
*Amount to be invested in comparison to one’s wealth (capacity).
*Ability to handle stress & fear of the unknown.
*Amount to be invested in comparison to one’s wealth (capacity).
*Ability to handle stress & fear of the unknown.
A person must have adequate life and medical insurance. I would suggest that this should be around five times your current annual income. Plus a good medical cover is a must. Premium, though not strictly an investment, should be added to the amount you have in non-equity investments. Apart from that, if you have any FDs or any other investment becomes the part of non-equity investment.
So, this clearly suggests that maximum amount must be allocated to equity investments. But the most important part about determining one’s risk profile is investing according to it, re-balancing to keep within the boundaries and above all resolving not to get distracted by the outside world.
So, this clearly suggests that maximum amount must be allocated to equity investments. But the most important part about determining one’s risk profile is investing according to it, re-balancing to keep within the boundaries and above all resolving not to get distracted by the outside world.
Similarly while investing, the problem is external inputs — the excitement in the anchor’s voice on television, the intelligent analysis of the expert, the voice of the minister, the statistics and the graphs... they all call for action on your part. Yet the wise investor needs to look inwards.
However, there are certain rules one must follow while investing in equities to make it a wealth creating & risk-free asset. One should be very much disciplined in making equity investments.
*Invest in staggered manner. Buy & sell stocks in parts.
*Do not overtrade anytime. Always keep min 20-25% in cash.
*Invest with the horizon of long term (say 2-3 years).
*However, book your profits regularly.
*Believe in the growth story of the company you have invested in, if you are not confident; take your money out of that.
*Keep checking performance & news of the portfolio companies.
Your wealth at retirement will be influenced by:
- Your current age, and expected age at retirement.
- Your current savings and monthly savings.
- Current return on savings.
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