A good, sound and durable investment plan starts by determining your objectives while understanding your likes, dislikes, and any limitations or constraints that may exist. While most objectives could be long-term, a plan must be designed to sit / live through changing market conditions. It must be able to prepare for unseen / unpleasant events along the way. If you have multiple goals (obvious if you are talking about a life time) then each of these goals needs to be taken into consideration. Once developed, and implemented, the plan will need to be reviewed at regular intervals.

Consideration should be given to your time-horizon for each goal within the big broad plan. For example, if college education expenses will be incurred in 10 years, a house to be bought in 14 years, cars replaced every 8 years, while retirement is 25 years off, then the plan needs to build in these different time-horizons and plan accordingly.

Building in your time-horizon and need at different points of time will impact which investment strategy you select for different portions of your portfolio. The lesser the time period to achieve a particular goal, the less the VOLATILITY (risk) you SHOULD want to take, because a significant drop in the portfolio may impact the amount of money available to withdraw to achieve that goal! Also you may have withdrawn more and so when the rebound happens in the market, you do not have enough money to participate!  It is also crucial to give some thought to your tolerance for market volatility and loss. You also need to assess your strength, ability and willingness to contribute money into the plan each year. And your ability to step up the SIP – which only a few fund houses like Icici Pru Amc allow. Higher returns often come with greater risk (which requires time to handle), so the trade-off is one that needs to be understood and chosen carefully.

Make the Plan

Without a plan, many investors take an haphazard approach to creating wealth by building a portfolio! This leads to buying the fashion of the week or month, focusing on acquiring popular investments chosen by the television anchor! This is done without considering how the entire portfolio has to be constructed to meet the different objectives. Mostly investors’ actions are influenced by the performance of the share market, indices, friends who claim to have done well, etc. This means now there is a tendency to increase share market exposure when markets are moving higher (and reducing stock exposure when markets are falling). This behavior will result in investors buying high and selling low and may cause them to destroy the carefully built portfolio.

Diversification is necessary

To achieve objectives over various periods of time – 3, 5, 10 and 25 years your portfolio will have long term debt products, short term debt products, liquid fund (emergency fund), equity funds, hybrid funds, gilt funds, etc. It is the job of the adviser to tell you which product is for which goal. Obviously the goals further away from today will have more equity and nearer goals will have lesser equity. Remember that it is the asset allocation choice that decides on the total return. In the long run it is equity which will give you higher variation (sleepless nights), higher risk and higher returns.

Your portfolio’s risk is reduced by diversifying across asset classes (shares, bonds, real estate, mutual funds, metals) and also within each asset class – long bonds, short bonds, mid cap shares, large cap shares, etc. Various asset classes and sectors of the market often perform differently from one another and diversification spreads this risk. Creating and owning a diversified portfolio with exposure to many asset classes allows you to meet your goals – assuming that you adhere to what is being told to you!


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