Simple steps to reduce risk in your investment portfolio

If you are afraid of losing money in the short term, you are not aggressive at all. And even if your risk appetite is high, there is no point in unnecessarily holding risky investments when a balanced portfolio with the right focus can help you achieve all your goals on time.

Take stock of things:

So, if your portfolio becomes too risky, Aditi Khandelwal, certified financial planner And in-house influencer, Jupiter, says, “The first thing you need to do is jot down all the investments you have made so far in one page. In the second, write down your goals and investments you want to continue with.”

For example, maybe you have 60% to 70% direct investment in stocks, but you feel that you are not comfortable with that. Then you need to analyze how to liquidate and diversify the portfolio.

However, in most cases, the investor may need professional help for this, says Khandelwal.

Liquidate risky assets:

This is a bit tricky, says Amit Trivedi, personal finance coach, speaker, and author of Riding the Roller Coaster, because retail investors are always confused as to whom to sell/keep.

Providing a solution to this dilemma, he stressed, look at all the components of the portfolio carefully. Then, first of all, sell the components you have the least understanding of. For example, if you don’t understand the pharma sector, but you have such stocks in your portfolio, sell them first. Even after that, if your portfolio is riskier than you can afford, then sell the riskier components as per your understanding.

Liquidity is essential. It provides you protection against fall in income or loss of income. Also, says Khandelwal, make sure your emergency fund and insurance are in the right place.

Asset Allocation as per Investment Horizon:

An asset allocation strategy should be determined based on your age, investment goals and risk tolerance. “Accordingly, you can divide the portfolio into -3 or 4 components depending on the time frame. Something that is near term should be in assets that exhibit low risk, then investments made for medium term goals should be slightly riskier than short term goals,” says Trivedi.

However, if you are investing for the long term then it is worth taking the higher risk. Explaining through the rules of compounding, Kalpen Parekh, MD & CEO, DSP Mutual Fund says, the formula for wealth is A = P * (1 + R) ^ time. Mathematically time is an exponential variable between P (principal) and R (rate of return). Therefore the effect is greater for a longer period of time.

“For example, our oldest fund has earned a 20% return in 24 years. So its compound return is not 24 x 20% = 480%. It’s actually 8000%. This is why the investment is actually making money. should be for a long period of time,” he says. Simply, the power of compounding.

Diversification of Investments:

Along with asset allocation, it is equally important to diversify your investments. “And, good diversification is investing in asset classes that do not move in the same direction,” says Parekh. In investing, a low correlation indicates that no two asset classes move in the same direction. “So when one asset class rises and another falls, the losses from underperforming investments are offset by the gains from outperforming investments,” says Culpen. This way the gains in the combined portfolio appear to be larger than their mathematical average.

Now diversification needs to be done at a different level, says Trivedi, adding that you need to diversify companies through your stock and bond portfolios. Second, within a stock and bond portfolio, you need to diversify across industries. Then, you diversify into categories like stocks, bonds, commodities, etc. In addition, there is international diversification.

Review your financial plan:

The moment you finish the asset allocation and diversification exercise, comes the review part. Over time, any long-term goal will turn into a medium-term goal, and then, it will turn into a short-term goal. Whenever the investor moves closer to the target, the risk profile prescribed for that particular target needs to be adjusted appropriately.

“Monitoring of the portfolio is a part of the review process of the financial plan. You look at the portfolio to know whether it is still in line with your changing investment situation. If your position has changed, your portfolio needs to be revised accordingly,” explains Trivedi.

Khandelwal says that your portfolio should be monitored at least twice a year, that too when you are making huge expenditures.

A prudent investing approach is to start with low risk and then build up to upward risk. “If one’s life goals can be met by keeping money in a savings bank account, then he should do the same. But unfortunately, we do not have that luxury, so we have to take risk in investing,” Trivedi concluded. But, make sure those risks are calculated.