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In a buying spree, retail investors often end up chasing ‘the best performing’ stocks, funds etc without processing whether they align with their investment goals or risk appetite. This is because most people do not understand the consequences of holding a risky investment profile, and others assume themselves to be aggressive investors. “But when I ask them if they can handle a 30% to 50% drop in investments in the short term, the expected answer is - I don’t want to see a loss in my portfolio," says Amit Trivedi, personal finance coach, speaker and author of Riding the Roller Coaster, 

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

Take a stock of things: 

So, if your portfolio turns too risky, Aditi Khandelwal, Certified Financial Planner & In-house Influencer at Jupiter, says, “The first thing that you need to do is write down all the investments that you have done so far in a page. In another, write down your goals, and investments that you intend to continue."

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

However, in most cases, the investor might need professional help for that, says Khandelwal.

Liquidate risky assets:

This is a little tricky, says Amit Trivedi, personal finance coach, speaker and author of Riding the Roller Coaster, adding, as retail investors are always confused about which ones to sell/hold. 

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

Liquidity is essential. It gives you a protection against a drop in income or loss of income. Apart from that, Khandelwal says, make sure that your emergency fund and the insurance is at 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 break the portfolio into - 3 or 4 components - based on the time horizon. Something that is near term, needs to be in assets that exhibit lower risk, then the investment meant for medium-term goals should be slightly riskier than the short term ones," Trivedi adds. 

However, it is worth taking high risks if you are investing for a longer-term horizon. Explaining through the rules of compounding, Kalpen Parekh, MD and CEO, DSP Mutual Funds, says, the formula of wealth is A = P* (1 + r) ^ time. Mathematically time is an exponential variable amongst P (Principal) and R (Rate of Return). Hence longer the time higher the impact. 

 “For example, our oldest fund over 24 years has earned 20% returns. So it’s compounded returns are not 24 x 20% = 480%. It's actually 8000%. That’s the reason investing should be for the long term to really make money," he adds. 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 across asset classes that don’t move in the same direction," says Parekh.  In investing, low correlation denotes that no two asset classes move in the same direction. “So when one asset class rises and other falls, losses from poor performing investments get mitigated by the gains from better performing ones," adds Kalpen. That is how the gains in the combined portfolio look bigger than their mathematical average.

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

Review your financial plan:

The moment you finish the asset allocation and diversification exercise next comes the reviewing part. Over a period of time, any long-term goal will turn into a medium-term goal, and then, it will turn into a short-term goal. As and when the investor comes close to the goal, the risk profile determined for that particular goal needs to be appropriately adjusted.

 “Monitoring the portfolio is a part of the review process of the financial plan. You look at the portfolio to know whether it still aligns with your changing investment situation or not. If your situation has changed, then your portfolio needs to be accordingly modified," Trivedi points out. 

Your portfolio should be monitored at least twice a year, Khandelwal says adding, also when you are making a big expenditure. 

A prudent investment approach is to start with low risk and then build risk upwards. “If one’s life goals can be met by keeping money in a savings bank account, then he/she should only do that. But unfortunately, we don't have that luxury, hence we have to take risks in investments," conclude Trivedi. But, make sure that those risks are calculated. 

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