Five mantras to save money in wild markets

For those who have given great returns in the past one year, or those wondering whether to invest now or those disciplined investors unsure whether they have made the right allocation, it is the right time to assess how well you can invest your hard earned money. How well are you protecting your earnings? Here’s how you can do that.

1. Ask yourself why you are investing. Is it to meet financial goals or because everyone is making money and you are missing out on some quick returns? If financial independence is what you are working for, how do your current investment options work towards helping you achieve it? Are your priorities being affected by current market events? For example, are you going straight from a Systematic Investment Plan (SIP) to stocks because the short-term performance of the stocks is good? It is not easy to consistently outperform the indices in the long run. Similarly, if you are moving from fixed deposits to NCDs, you are putting your financial goals at risk.

Financial freedom is available to those who learn about it and work for it. If you do not have an investment strategy, and for those who do have one, evaluate how your current actions are affecting the investment strategy.

2. Have you received the correct information? To develop an investment strategy, accurate information is essential. Investment decisions are based on rumors or information shown in a way to influence positive buying decisions. Online platforms reflect performance over the past three to five years, and that too not absolute returns and risk-adjusted performance. With periodic rebalancing in bundled stocks/ETFs (Exchange Traded Funds), it is difficult to compare them with the benchmark or any other basket. In products like P2P, the details about the regulated entity are unclear. Thoroughly double-check your current holdings and exit if you find that they do not suit your risk profile.

3. Are you setting the right expectations? I think investors are expecting 20-25% return from equity portfolio, which gets added to other investments as well. Investors also do not know the correct way to calculate returns and often make decisions based on absolute returns. In addition, returns are considered on an aggregate basis and not by including expenses, taxes and inflation. Incorrect return estimates mess up financial plans. Investment horizon is an important factor in meeting these forecasts, and it also needs to be determined appropriately. 10-12% p.a. in equities over a period of 7-10 years, go with conservative return assumptions and re-check your plans accordingly.

4. Are you ready to face deep recovery? In the past too, markets have risen sharply and strongly, and have fallen equally rapidly and deeply. Can you and your portfolio face the crash in March 2020 like just 18 months ago? If not, it’s time to move some portion of the portfolio to less risky, uncorrelated asset classes, even if it means missing out on some returns. Certainly, unregulated investments like bitcoin should be ruled out.

5. Do you have a financial plan? Financial goals are generally accomplished with long-term systematic investments in consistently returning instruments. In addition, asset allocation determines portfolio returns. Create a financial plan and tag assets for goals to check whether they will actually work towards your financial goals. A financial plan can bring discipline to an otherwise ad hoc investment. It helps you save your most precious asset – time.

Without a game plan and a strong sense of confidence in what you’re doing, it’s going to be really hard to preserve wealth.

Mrin Agarwal is a financial educator and the founder of FinSafe India.