Home / Money / Personal Finance /  Five mantras to preserve wealth in wild markets

Investing seems to be everybody’s favourite pastime these days. Making money has become quick, exciting and easy. Even at current high valuations, investors are diving in based on the liquidity and the fear of missing out. It seems like prices can only go up, irrespective of the fundamentals. No wonder cryptocurrencies are thriving.

For those who have made fabulous returns in the past one year, or those wondering whether to invest now or those disciplined investors unsure if they made the right allocations, this is the right time to assess how well you are preserving your hard-earned money. Here is how you can do so.

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 freedom is what you are working towards, then how do your current choices of investment work towards helping you achieve this? Are your priorities being overshadowed by current market happenings? For example, are you moving out of systematic investment plans (SIPs) into direct stocks just because stocks have good short-term performance? It is not easy to consistently beat 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 independence is available to those who learn about it and work for it. Build an investment strategy if you do not have one, and for those who do have one, evaluate how your current actions are impacting the investment strategy.

2. Have you got the right information? To develop an investment strategy, the right information is a must. Investment decisions are based on hearsay or information shown in a way to influence positive buying decisions. Online platforms show last three- to five-year performance, and that too absolute returns and not risk-adjusted performance. With periodic rebalancing in bundled stocks/ETFs (exchange-traded funds), comparing them with a benchmark or another basket is difficult. In products such as P2P, details about the regulated entity are sketchy. Re-examine the current holdings thoroughly and exit if what you discover doesn’t suit your risk profile.

3. Are you setting the right expectations? I find investors expecting 20-25% returns from equity portfolios, which gets extrapolated to other investments, too. Investors also do not know the right way to calculate returns and often make decisions based on absolute returns. Further, returns are considered on a gross basis and not net of expenses, taxes and inflation. The wrong returns projections make financial plans go awry. The investment horizon is an important factor for these predictions to play out, and that, too, needs to be set fittingly. Go with conservative returns assumptions, say, 10-12% per annum in equities over a 7-10 year period and recalibrate your plans accordingly.

4. Are you ready to face a deep correction? In the past too, markets have run up quickly and strongly, and have fallen equally faster and deeply. Can you and your portfolio withstand a crash like the one just 18 months back, in March 2020? If not, it is time to move some part 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 exited.

5. Do you have a financial plan? Financial goals are typically met with long-term systematic investing in consistently returning instruments. Moreover, asset allocation determines portfolio returns. Create a financial plan and tag assets to goals to check if they will actually work for your financial goals. A financial plan can bring discipline in otherwise ad hoc investments. It helps you save your most precious asset—time.

Without a game plan and without a strong sense of faith in what you are doing, it is going to be really hard to preserve wealth.

Mrin Agarwal is financial educator and founder, Finsafe India.

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