Do You Mainly Depend Upon Past Performance before You Invest?

 

While investing in stocks, bonds and mutual funds, past performance becomes a strong input in making investment decisions. Question, should keep on relying on it excessively or there are other indicators available to investors, on which they can rely on to make investment decisions.

 

While looking at past performance look at the future too...

 

However, for a lay investor, it will not be easy, as the famous economist, John Keynes had said, in the long run we are dead. As investment in stocks and mutual funds are normally long term, investors may use this indicator too to support their past performance data.

 

Past Performance is one of the factors to be considered before taking the investment decision and past performance is not the only factor to be considered. Are you relying mainly or only on the past performance?  It is like looking at the rear view mirror and driving. You are headed towards a fatal accident.

 

What are all the other factors to be considered before looking at the past performance?

 

Diversify your portfolio...

 

There is an old saying. Never put all your eggs in one basket. In today’s risk management language it is called concentration risk. In fact in banks, concentration risk is considered one of the most important credit risk factors for the bank. Reserve Bank of India, as a policy measure, have recommended banks to strictly follow exposure norms, i.e., not to lend a borrower or a group of borrower or in a particular industry or business or financial instrument or geographical location beyond a certain percentage of the capital of the bank.

Investors may take an important lesson from this guidance of the Reserve Bank while deciding on the composition of their investment portfolio. To spread the investment in to different segments of business, industry, types of instruments, and then may invest.

 

Have a judicious mix of equity, debt and precious metal in your portfolio...

 

If you are less than 40 years, you may have a mix of portfolio, where equity would be say 50%, Debt 30% precious metals and other investment 20%. As you advance in age the equity portion will reduce and others should increase. In India, the returns on equities in the last 40 years have outstripped far higher compared to all other investment options. But, please remember, return on equity should be always expected in the long run.

 

Factor in time diversification... 
 

Market or business cycles vary from industry to industry, business to business. Also business cycles should be also factored in to for long term.. Longer the time period we take and more businesses or industries we diversify, the peaks and lows of business cycle even out.

 

Investors would definitely argue, if we only invest in the long run, what about short term fund requirements. For short term investment bank FDs, and income funds are the best instruments. For income funds you may check the duration of the income funds, and match the duration of the income fund with your investment time horizon.

Say if your investment time horizon is 1 year you may choose an income fund with duration of approximately 1 year.

 

You need to diversify your investments across different time horizons like long term, medium term, short term, and ultra short term. So that your portfolio will participate in different stock market cycles and interest rate cycles and generate better return by reducing the overall risk.  To neutralise the over dependence on past performance of your stocks/ bonds/ mutual funds, the above options will be helpful to give a good return on your investments while minimsing the associated risks.

 

The author is Ramalingam K, CFP CM is the Chief Financial Planner at holisticinvestment.in, a leading Financial Planning and Wealth Management company.   

 

How the Investor can maximize VALUE of his Investments?

What would it be like if we tried to click the mouse pointer on an icon and the icon kept shifting position? It would definitely irritate and frustrate us. Similarly “value” is something which can behave like the irritant icon. In the financial world which “value” is “true value” for a particular investment can be difficult if not impossible to determine. This is because the parameters based on which evaluation is being made may shift, throwing up a different figure each time.

 

Value

 

So what is “value” ? It is generally believed that the value of a stock is built around the organization’s patents, brand, fixed assets like land and building, financial resources, human capital, financial resources, growth potential or ability to produce earnings and cash flow. Many would be of the opinion that it is the organization’s ability to produce consistent earnings over a period of time. At the other end of the spectrum would be something called “liquidation value”, which in simple terms would be the short-term assets which are pegged at a higher value, after meeting all liabilities than the market quoted capitalization.

 

Back in the 1950s’ people were interested about the information pertaining to business enterprises which were on the verge of liquidation as the prices tended to move north when such an eventuality presented itself. “Worth more dead than alive” was a rhetoric which was popularly used to describe such opportunities. However it is important to note that the ‘value of today’ may be different from what it was yesterday and could vary with the “price of tomorrow”.

 

It boils down to the fact that it is of paramount importance to the investor to get his assessments right, as that is where the crux of the matter lies. A conclusive assessment of the stock value which the investor loosely believes in is far better than an inconclusive or incorrect opinion on valuation which is firmly believed and implemented. 

 

The Relationship between Price and Value

 

It is always true to say that “value for money” is derived from acquiring an article or making an investment when the utility derived from the object (article or investment) is greater than the price paid for it. This analogy may be further extended to state that “Investment success doesn’t come from buying good things but rather buying them well”.

 

Identifying Opportunities for Value Investments

 

Investment markets are of a nature which creates opportunities from people who buy and sell emotionally and from people who trade in the market instead of investing in the market. That’s why Warren Buffet quoted that ‘ Stock market is designed to transfer money from Active to the Patient. It is important to note that the investor needs to make a concerted attempt towards understanding the mind and motives of other investors. It can provide enriching knowledge and experience required for sustained profitability in the financial world.

 

On the flip side, investing aimlessly would be like chasing a mirage. An oasis which seems to exist but actually may or may not be there. It leads to a situation where the investor will either gain a windfall or  incur stupendous losses. It can be safely concluded that – buying something at less than its intrinsic value is what it is all about in the investment market.

 

Adding Value

 

No prediction is cent percent foolproof unless proved so in the long run. The full risk in a portfolio can only be understood threadbare until hindsight is visible and by then perhaps the worst is over anyway. It is always a good policy to weigh the management performance against the market volatility to have a fair estimate of the investment opportunity when such a possibility presents itself.

 

Value Investing Skills

 

What kind of result a person can expect if he masters the value investing skills? Here is a matrix which has been used by Howard Marks to compare the priorities and expected outcome of two different investors and an assessment of their respective prospects:

 

	Aggressive Investor	Defensive Investor
Without Skill	Records high gains when the market is on an upswing and looses heavily when the market moves down.	Does not lose much when the market moves down but does not gain much either when the market moves up.
With Skill	Records high gains when the market moves up but does not lose as much when the market moves down.	Does not lose much when the market moves down but does record good gains when the market moves up.

 

 

Tips to become a better Investor

 

So what does the investor do to assess value of an investment which he or she has made or proposes to make in the future? Well, if we may emulate Warren Buffet, the best thing to do is to gather as much relevant information as possible. Buffet, is known to read the Wall Street Journal, New York Times, Washington Post besides the business section of the Los Angeles Times, Chicago Tribune, Fortune, Forbes and Business Week.

 

1.     Read the business section of your daily newspaper with particular attention to news on companies whose stock you hold or propose to hold.

 

2.     Gather a fair idea of the different economic parameters which have an effect on stock price- petroleum prices, GDP figures, ratings by international rating agencies etc.

 

3.     Fix your own parameters as regards your risk taking ability, the amount of investment to be made and other investment priorities.

 

The above should hold every investor in good stead on a long term basis. 

 

The author is Ramalingam K, CFP CM is the Chief Financial Planner at holisticinvestment.in, a leading Financial Planning and Wealth Management company

 

What every Investor needs to know about Stock Market, Currency market and Commodity Market to make Profits?

 

 

Few best kept secrets, you may not know about Stock Market, Currency market and Commodity Market

 

What is the most profitable place to invest? Stock Market or currency market or commodity market…? Confused about which market to invest…?

Understanding the fine distinctions between these markets, often spells the difference between failure and success in investing.

Being a regular reader of  personal finance columns,  you must be knowing about what stock market is, what currency market is and what commodity market is. I would like to highlight a key difference between stock market and the two other markets.

 

A Key Difference:

 

Stock exchange has got both the spot market as well as the derivatives market. Whereas the commodity exchange or currency exchange have only the derivatives market. Let us quickly recall what is spot market and derivative market.

 

In a spot market, as an investor you can buy shares and hold it perpetually. You can sell it whenever you decide to. You can hold the shares for long term – say 5 years or 10 years. For Example, you can buy Infosys shares and keep it for 5 years or 10 years.

In the derivatives market, you will do advance booking to buy or sell a particular quantity of shares or commodities or currencies on a pre-determined settlement date for a pre-fixed price. As you are doing only advance booking you need not pay the complete price; you need to pay only the margin money. You can’t hold these contracts perpetually. You need to either buy or sell the shares or commodities or currencies on the pre-determined settlement date.

 

Let me illustrate. In the commodities market you would like to trade in crude oil. Minimum size of a crude oil contract is 100 barrels. The price of the contract as of 18^th june 2014 is Rs. 632100. This contact will expire on 19^th Nov 2014. You need to pay 5% of the contract value as the margin money.

 

If you expect the crude prices to go up, then you can buy this contract. If you expect the share prices to go down, you can sell this contract. Say you expect the prices to go up. So you buy this contract by paying the margin money of Rs.31605. On 19^th Nov, if the crude moves up to Rs. 6,39,900, then you will gain Rs. 7800.

 

On 19^th Nov, if the crude moves down to Rs. 6,24,300, then you will loose Rs.7300.

Let me reiterate the key difference. Currency and commodity exchange have only the derivatives market. Stock exchange has got both the spot market and the derivatives market.

 

Derivatives as a tool for hedging:

 

The original purpose behind derivatives is hedging. You can hedge yourself against the future fall or rise in the price of a particular asset. Why do you need to hedge? Let me explain you with an example.

 

Say you are an importer. You have placed an order with the exporter. You need to pay the exporter at the end of 3 months in dollars. You are not sure how the exchange rates will move. If the rupee value falls at the end of 3 months, then you may end up paying more in rupee terms to settle the exporter. This will cut your bottom line badly.

 

So you do advance booking for dollars which you will take delivery at the end of 3 months by paying a small margin. By doing this you have removed the downside. You have hedged yourself against the rupee fall.

 

Similarly an agriculturalist that is producing wheat can book the sale price for his produce now-itself, however he can do the delivery after 3 months. He has hedged himself against the fall in the prices of wheat. Somehow, the fall or rise in the price of a particular asset is going to affect you. So you protect your position by hedging with derivatives.

 

Derivatives as a tool for Speculation:

 

Though the original purpose of derivatives is hedging, it is often used as a tool for speculation.  Though, the fall or rise in the price of a particular asset is not going to affect you, you trade in derivatives to profit from the price movements of an underlying asset.

Say you are not an importer. However you expect that the rupee value will fall and want to gain out of that. Therefore you do advance booking for dollars. This is pure speculation.

 

Stop Speculating and Start Investing:

 

Stop speculating in the derivatives market and Start investing in the spot market. Speculating in derivatives market is a zero sum game. Either buyer or seller of the contract can make money. Both can’t make money. Whatever the loss of one person will be the gain of another person.  Money is not generating more money. Money is not put into productive use. Money is rotated. Money moves from one pocket to another pocket.

As you need to pay only the margin money, you may take over exposure which will increase the overall risk.  Either you will make huge profit or huge loss. This leads to greed and emotional imbalance. Therefore you will loose control at some point in time.

A person who gains in ALL the speculative transactions is only the broker. That’s why Benjamin Graham says, “The investors make money for themselves and the traders make money for their broker”.

When you are investing in shares through the spot market, both the buyer and seller can make money. For Example, Mr.A can buy a share for 100 Rs and keep it for 5 years. At the end of 5 years, he may sell it to Mr.B for 200 Rs. Mr.B can hold the shares for another 5 years and sell it to Mr.C for 400 Rs.

Both the buyer and seller can make money. Here money is not rotated; money is generated.

As you are investing in shares of a company, the company does its business with your money as capital. The company generates more money by way of profit in its business. Because of the profit the share prices go up.

As our money is put into productive use, it breeds more money. As a result, both the buyer and seller can make money by investing in the shares for long term. If you patiently accept the short term volatility you will have long term gain. As you are patient enough and investing only long term money in the stock market, you will be emotionally balanced.

In the spot market, as you are investing for long term, you need to buy the shares by paying its full value and not paying just the margin money. So you will take risk only to the extent you can afford to. Hence, you will not loose control over your investments.

Tell me why:

I have asked this question frequently with the investors. Tell me why you would like to invest in the stock market or commodity market or currency market. Most of the times, their reply will be very vague. They will say, ‘I would like to make more money’.

When you just say you want t make more money, it is not very clear that, you would like to make more money in the short term or long term…? What is your return expectation…? Is it 15% or 50%...?

As you are not very clear about your purpose of investing, it is easy for the broker to confuse you and give you a sugar-coated sales talk about making quick money by trading in the derivatives market.

Why brokers recommend trading in derivatives market over investing for long term in the spot market?  In the derivatives market, though you are asked to pay only the margin money, the broker charges his commission as a percentage of the total contract price.

In addition to that, in derivatives market, you can’t invest for long term, so you need to frequently trade. For every trade broker makes money. Also he can feed your greed easily.

In the spot market, if you invest for long term say 5 years or 10 years, broker makes less commission, that too once in a while.

If you are very clear about why you want to invest in the stock market or commodities market or currency market, then the sugar coated sales talks of the broker will not affect you. The very clear answer for the question ‘why you want to invest in the stock market…?’ is ‘I want to meet my long term financial goals with inflation adjusted returns by taking calculated risk’.

Clarity is power. Clarity brings focus.

 

The author is Ramalingam K, CFP CM is the Chief Financial Planner at holisticinvestment.in, a leading Financial Planning and Wealth Management company

 

Investment Discipline: One thing that Changes Everything about your Investments

There are people who are disciplined and there are who are not. What is the difference between these two sets of people? The first set of people lead an orderly, healthy and peaceful life, prepared for the ups and downs, not upset with the lows, and make others feel comfortable in their company. The second set of people are those who keep moving from one crisis to the other driven more  by circumstances and responding to them wholly unprepared taking a toll on their health, peace of mind and relationship with others.

Why Discipline is Necessary?

Life is a journey. Whenever we think of going on a vacation do we go it just like that?. For such vacation, there has to be lots of planning and preparation to meet certain uncertain eventualities. Same is the situation for life. A planned journey makes it orderly, happy and peaceful. So is for life and so is for investment.

Discipline is a Key factor to be a Successful Long Term Investor:

Why do we need to invest at all? The answer is to meet our short term, medium term and long term financial goals. Our idea of investing is not getting returns from one single transaction, but to invest and generate returns in multiple transactions over period of time. So that, we can meet all our financial goals and be a successful long-tem investor. To be a successful long term investor, you need to be a disciplined investor. You need to follow some strategies consistently. You need to review your portfolio regularly.

Creating a Disciplined Investment Plan:

The Discipline of writing something down is the first step toward making it happen. We are living today much longer and we are going to live much longer tomorrow. Most people are not in a position to earn by working once they are above 75 years of age. If they have to live another 15 years or so they would need money and with inflation, they would need more money than today, to lead the present lifestyle.

Hence a disciplined investment approach will help them to achieve their long term financial needs and will not be required to depend on others. For this, one has to invest in equity more, when one is young, and after doing it for 25 to 30 years may start moving towards more to debt. You need to invest in such way that your investment are beating inflation at least during the accumulation phase i.e. pre-retirement phase.

A long term plan of investing in Mutual Fund SIP (Systematic Investment Plan), in mutual fund schemes with a good track record, will give you fabulous returns in an investment horizon of 25 to 30 years. The last 40 years in Indian economic scenario we have seen several ups and downs and we are going to see similar volatility in the next 40 years. The human spirit creates the volatility and also helps overcome them and move towards a more comfortable life style.

Why Discipline in Investment is Needed?

There is no magic wand that can resolve our problems. The solution rests with our work and discipline.

A journey of investment over 30 years is like going for the Mt. Kailash Manas Sarovar Yatra of olden days (not that of today where you go by air to Kathmandu, then take a beautiful SUV to China border and from there a still more beautiful bus to Mt. Kailash Manas Sarovar) where meticulous planning is required with regular monitoring when faced with uncertain weather and other challenges during the Yatra. A highly disciplined person would have been able to complete the Yatra and return to family and friends in those days.

Same is the case for a 30 years period yatra of investments, where you have vehicles like , Blue chip Company stocks, good Mutual Fund Schemes,  Gold ETFs and Fixed deposits with banks and will help you to build a financial castle which will take care of all the earthquakes, cyclones, and droughts of life beyond 75 years of Life. Get prepared in a Disciplined Way!!!

Some Disciplines to Ponder Over:

·         Create a customised financial plan, implement the financial plan and stick to the financial plan regardless of the market conditions.

·         Create an asset allocation ratio based on your risk taking appetite and required rate of return; Rebalance periodically and maintain the same asset allocation.

·         Continue your Mutual Fund SIP till you meet your financial goals. Don’t stop in-between.

·         Review your financial plan and investment plan regularly.

Discipline is the bridge between goals and accomplishment.

The author is Ramalingam K, CFP CM is the Chief Financial Planner at holisticinvestment.in, a leading Financial Planning and Wealth Management company. 

The Biggest Threat to your Investment Decisions and What You can do about it!

One of my clients got a call from her mother when we were seriously building her portfolio. I enquired after seeing her panicky reaction. Her mother wanted my client’s son to be removed from a school immediately because there is an accident happened in the swimming pool. The student died during a swimming session. How correct the decision would be to take the child out of the school without understanding what exactly happened?

Be it good or bad, human mind takes decisions based on availability bias. Read ahead to understand the impact of availability bias in the investment decisions we make and how we can avoid this situation.

What is availability bias?

The availability bias is nothing but taking decisions influenced by the recent happenings or under dramatic circumstances. Most of the times, we make decisions based on such occurrences. Yes, we do this while investing our hard earned money.

What happens when you take investment decision influenced by availability bias?

How do you decide to buy or sell stocks? Do you just rely too much on immediately available information? It could be something you read in a paper, advice from your friend or hyped among investors. Do you know what happens when you take such decisions?

You must know about few incidents that happened in the recent past. India’s largest coal production company Coal India came public in 2010. It was known as ‘mother of Indian IPO’. Some even claimed that Coal India IPO would show the mountain to climb for the investors. The investors rushed and bought a high number of stocks. Look at it now, just within 3 years. As the coal prices and so the stocks going down, it is considered as the most dreadful investment option by the investors. The reliance IPO stands out as one more example here.

The same happened with the tech bubble in the end of 19s and the beginning of 20s. Everyone wanted to become an entrepreneur and holding some stocks that has ‘.com’ in its name. Not only in India, house bubble that occurred in USA is the perfect example of people loosing huge if the decision is taken because of availability bias. The reason is the popularity of the products.

How can we avoid falling a victim of availability bias?

Sir John Templeton, a brilliant investor and mutual fund pioneer, even advises us to avoid popular. He says, “Avoid the popular. When any methods of buying or selling stocks become popular, move on to the unpopular one”

Taking decisions based only on emotions, immediately available information, popularity leads to disaster. What can be done to avoid putting ourselves in such scenario? Study, study and study more about the product before investing in it.

Read, analyse and map with your goals while creating a portfolio. Invest in a product only when you have made enough research about it. Listen to what others are saying without having any prejudiced thoughts. Use the information collected from others just as pointers for your research, not for taking any major decisions. Analyse the pros and cons of each product.

Seeing any red flags in the portfolio. Do not ignore them. Dig more to understand why you have them in red. At the end of the research the red ones may become green and vice versa.

Bottomline:

Think about September 11 terrorist attack on the twin towers in America. Remember looking at the planes crashing at the twin towers and the fatality it brought in? Imagine, what would have happened if people chose to go by road instead of flying due to availability bias? Road accidents would have gone up. Whereas in reality, flight journey has become much safer due to the safety measures applied all over the world.

Likewise, not getting influenced by your emotions, the recent ups and down in the market, information from your friend or family is very important while taking the most important decisions about your investments.

Still feeling difficulty to get rid of these. Follow the simple exercise to get rid of availability bias.

-          Write about a product you want to buy or sell

-          Write about the reasons why you want to buy or sell

-       Take a break once written. Go out for walk, read a book, watch a nice movie or play with your child, so that you don’t think your investments.

After a break read the reasons again and again. You will get a clear picture on what exactly needs to be done now. Take your decisions brilliantly now!

K. Ramalingam is the chief financial planner at Holistic Investment Planners, a leading financial planning and wealth management company.

3 Questions to Answer before you Choose an Investment

                                       

3 Questions to answer before you choose an investment

When you plan to make an investment, you must be fully aware of the ins and outs of your investment. Therefore, a good advice is to find answers to a few very necessary questions, before you can actually decide upon an investment. Let us explore what these questions are, where an investor needs to lay his focus on before investing his hard-earned money.

1.       Do I have an Exit Strategy?

It is good to always plan your exit, before entry – especially in case of any investment acquisition.Wondering why? Because no investment can be convenient for you, forever. With time, your objectives are most likely to change. There is a reason behind you acquiring an investment. As those reasons contravene, it is the right time for you to make an exit without much delay. Therefore, it is important for you to know your exit reasons well in advance.

Exit can be healthy, in a condition when your investment turns feeble. Such a step then, will make a room for new growth to take place. Everything is volatile, so should your portfolio be. This will help keep it harmonious with the time.

There is nothing like a permanent investment. Therefore, you must always have your exit strategy pre-defined, to avoid your first loss from turning into your worst loss. You should always keep saving capital, to be prepared for investing in the very next opportunity. Trimming your portfolio of troubled investments, you are making a space for new growth opportunities.

2.       Did the investment pass the ‘business common sense’ test?

Every investment must have some business sense behind it, after all, investment is eventually about business. Your earnings, valuation and ROI must be compatible with the benefits and obstacles, possessed by the underlying business. It is really not a good thing if you lose money through your investment. This Business Common Sense test can be used with perseverance, to help you escape from troubling investment speculations and obsessions that may cause losses.

Here, one must know the Common Business Sense Test, to help them avoid getting stuck in a hoax. This test is not just limited to dodging manias and speculations, but the same can also be used to detect possible frauds.

Always remember that your investment is like a property on either your assets or the earning power of your business. Whether in case of debt, equity or real estate – one must eventually be able to make a business sense out of the promised returns. If that is not happening, then something is fishy. Never forget the common sense investment advice that if it’s sounding too good to be real, then it probably not is.

3.       How does the investment affect my portfolio’s risk profile and mathematical expectancy?

Never make an investment that either does not raise the overall returns in your portfolio, or lowers its risk. By matter of choice, you should aim for getting both these things accomplished. All of the investments should be therefore analyzed for their risk profile, and mathematical expectation on how much should they return over time.

Winning or losing the game of investing is entirely based upon your intensity in the front line. Therefore, you must ask the questions as mentioned above, till the time you have the answers for making a wise decision.

The bottom line

Finding answers to these diligence questions can help you save yourself from the most common, but very expensive down the road and help you retire rich and quick.The bottom line lies in building a well-diversified portfolio, for a consistent and long-term investment growth.

The author is Ramalingam K, CFP CM is the Chief Financial Planner at holisticinvestment.in, a leading Financial Planning and Wealth Management company

3 Steps to Control Risk in your Investment Portfolio

 

              3 Steps to Control Risk in your Investment Portfolio  

Any investor would agree that ignorance and lack of awareness in the investment field can prove to be expensive. In the world of finance and investment, risk management is very closely related, rather necessary for measuring performance. Understanding risks is therefore, a crucial part of building your financial and investment knowledge.

 

Before making any investment, it is common for us to explore the benefits it offers. However, it is all the more important to be aware of the risks involved in the investment. Knowledge of the potential risks, will help us to manage and control the hidden losses that it can cause.

 

Therefore, a good advice here is a detailed investigation of the investment, before actually jumping into it. Sometimes, this may involve a lot of hard work but down the line, it will surely save you from expensive losses.

1.       Understand the Risk Management

Managing risks is an important factor, to lay your focus on before making an investment. We usually have a tendency of considering risk as something negative. Here, we are likely to forget the notable paradox, which suggests that we do not completely understand any investment, till we know all its related means of losing money from it.

 

In other words, we should identify all the major risks that could lead to probable losses, well in advance. Thereafter, we need to proactively manage all the feasible risks. Let us now have a detailed understanding of the risk management process.

2.       Identify the Risk Profile:                                                            

The primary step will involve identification and grouping of the risks, associated with your investment.With a well-designed investment portfolio and strategy, it is possible to manage every critical risk, except for a certain uncontrollable risks.

Let us now study about some specific inherent risks, classified into four major categories.

 

                                 i.            Company-specific:

These include anything that is particular only to the company, and is not a part of the industry as a whole. Example of such risks are lawsuits, mismanagement, etc. Such risks can be controlled via diversification.

                               ii.            Industry-specific:

These comprise of alterations in the consumer preferences, technologies and industry laws. These can be controlled via not restricting your industry portfolio to any single domain.

 

                              iii.            Investment Style:

 These risks may be associated with value vs. growth, or large cap vs. micro cap investments. The market varies with how it manages different investment styles over time. These risks can also be managed by not concentrating on a particular investment style.

 

                             iv.            Market Risks:

 These risks are manageable through self-discipline, or by diversification into non-correlated markets such as real-estate, cash & commodities, international equities, etc.

 

3.       Creating a Controlled Risk Profile:

Post understanding the risk profile, you must design ways to control possible risks. In the second place, you must accept only those investments whose unmanaged risk profile does not overlap with other investments of your portfolio. This will result into minimizing the overall risks. 

Each investment has its own set of exclusive tools available for risk management. This results from the unique features of the investment and its trading markets. Every market, having its unique characteristics, can thus be utilized for effective risk management. This is because, what works for one market, may not work for the other. 

The symbol of a good investment, is not just achieving strong positive profits, but also consistent and risk-free returns in all market scenarios.

Conclusion:

Risk is integral to return. Every investment thus, accompanies some degree of risk with itself. Risk is a quantitative measurement, both in absolute and relative terms. Therefore, a strong understanding of risk and its different forms can surely help investors in better decision-making. This will also help them better comprehend the opportunities, settlements and costs involved in different investment approaches.

 

The author is Ramalingam K, CFP CM is the Chief Financial Planner at holisticinvestment.in, a leading Financial Planning and Wealth Management company