5 Ways to safeguard your investment portfolio

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Introduction

Investors have witnessed a glorious rally in equity markets post COVID-19. In such an exultant state, investors often succumb to stupid mistakes and eventually might miss out on the big opportunity whiles others would gain. Here are the 5 crucial ways to safeguard your investment portfolio. 

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5 ways to safeguard your investment portfolio

1. Have a Contingency Fund

  • One should keep aside minimum 6-months monthly expenses as a contingency/ emergency fund
  • For a salaried person, contingency fund must equal to 6 months of salary. While for a self-employed person, contingency fund should be 12 months of household expenses and financial commitments.
  • An emergency fund can be parked in liquid funds or short-term FDs or even high interest savings accounts.
  • With a contingency fund, an individual wouldn’t have the need to disturb his long term investment and can easily meet any sudden and unanticipated short term needs.
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2. Follow Asset Allocation

  • “When should I book profits?” is a rife question and an issue of worry among retail investors. A simple remedy to tackle this problem is to follow Asset Allocation. Review and re-balance your portfolio half yearly and yearly. Conduct re-balancing among your assets like equity, debt, gold, etc.
  • 95% of portfolio success depends on your asset allocation and your ability to follow that allocation. Concentrate on your overall net worth instead of individual investments in stocks or mutual funds. Always look at the bigger picture.
  • Often when all is hunky dory and markets are in a state of euphoria investors tend to enhance their risk profile say from conservative to moderate, aggressive to more aggressive and so on. What an investor must understand is that changing risk profiles does not change their respective risk appetite i.e. their ability to take on risk. An act like this throws the investors asset allocation off balance thereby putting their financial plans and goals in jeopardy.
  • Investors should be prudently watchful and vigilant ensuring that that they are not influence by market noise. Investors should at all times keep their emotions in check and stick to their risk profile.
  • Follow constant weight asset allocation strategy.
Asset Allocation According to Risk Profile
Asset Allocation
Change in risk perception leading to changes in asset allocation
Change in risk perception leading to changes in asset allocation

3. Avoid Panic Selling and Buying in Market Lows and Highs respectively

  • An individual should never go for panic selling in market corrections as well as never fall prey to FOMO (Fear of Missing Out) factor while investing in equities.
  • Many individuals frequently try to time the market while making their investments. This is not a prudent practice to follow. Timing the market for investment purposes is akin to trading and speculating.  Even churning your mutual fund portfolios intermittently is inefficient, as you will be unable to enjoy the power of compounding in the long run. This is the critical disease of financial indiscipline, which will have detrimental consequences. Hence an investor should not fall trap to it and triumph over it to in order to have a successful wealth creation journey.
  • Investors should refrain from timing the market and instead invest in a staggered and disciplined manner through SIPs over the long term.
Market cycles and associated investor behavior
Market cycles and associated investor behavior

4. Risk Management in Financial Planning

  • One should at all times cover themselves and their family with life insurance & medical insurance cover to protect against uncertainties if any.
  • It ensures that your immediate family has some financial support in the event of your demise, to help finance your children’s education and other needs or to have a savings plan for the future so that you have a constant source of income after retirement.
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5. No Impulsive Purchase Decisions for Real Estate

  • Expensive impulsive purchase decisions like real estate or a new car should be avoided. Individuals should take into consideration their short term as well as long term goals and not get carried away. These decisions could prove to be detrimental to one’s equity/debt investments for the long horizon.
  • Hence, it’s better to be safe than sorry.





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Invest Yadnya

Invest Yadnya

Yadnya Investment Academy focuses on Investor Education, Personal Finance, Money Ideas, Mutual Funds, Stock Market, Investing, and Savings.
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