Conservatism over Aggression: The Last page on the rulebook of investment

What is the purpose of a normal investor?

Is it to build a great company?🏢 Is it to revolutionize a business?💼 Is it to join a corporation's miraculous journey?🚙 Is it to witness an emerging technology take over the world? 🧑🏻💻

NO! ❌

A casual retail investor participates in the market only to reap good returns on the money invested in order to meet their financial aspirations.🎯 An ordinary person who has a surplus fund is only here to make good returns over their idle money. 💰 Be it an investment in Fixed Deposits, Gold, Bonds, Stocks, Mutual Funds, Crypto assets, Real estate, or any other asset class, the final destination is to build and sustain wealth. 💸

You never invest money by timing the market, instead, it is good to have disciplined investment strategies to maintain good returns in your portfolio throughout the investment period, despite all the ups and downs in the market, indifferent to the short-term market mood. 

In the same way, the exit point also needs to be certain, always! 😎

But have you ever given a thought, 

What if you were to retire in March 2020 amidst the Coronavirus pandemic, where the markets were in a critical condition? 🚑

What if you were to retire in September 2008 amidst the Great Recession, where the markets tanked awfully? 🏦

What if you are retiring in the current times, in 2022, amidst the financial shock from the Russia - Ukraine Conflicts? 🪖

This thought gives a chill in the spine! 😓

Retirement is a journey through the second half of life and you would want a regular piece of the pie that you accumulated over a period. So, you can gradually disinvest or get into a Systematic Withdrawl Plan (SWP) and escape from the shadow of the temporary market tremors, but what about those aspirations of life that need lumpsum money? Children's education, marriage, buying a new house/car are those events that need lumpsum cash. You cannot push these events to the future hoping your investments get back into their fair valuation, because markets take time to come back in a good mood as the change in the perception of the entire group of investors in the market is a time-consuming process. The economic cycle shouldn't define when you reach your financial goal. 🗿

The investment risk isn't the same for 30 year old and 60 year old! 👨🏻👴🏻

So, the investment challenges should be addressed in the context of the investor's financial goals. The need of the hour is the alignment of investment strategies with the investor's financial goals. ⭐

When investors have a longer investment horizon, they can take on more risk, since the market has always delivered great returns when you pinch out the graph to a long-term horizon, major dips have also had a pullback in the long run.💯 For example, an investor with an investment horizon of 30 years would typically have most of their assets allocated to equities. The short-term swings have little to no impact on investors looking to hold on to those stocks for the next 30 years.💹

While the same strategy may be risky for investors with shorter investment horizons. 

Investors adjust their portfolios as their investment horizon shortens, typically in the direction of reducing the portfolio's level of risk. 👛 For example, most retirement portfolios decrease their exposure to equities and increase their holdings of fixed income assets as they near retirement. Fixed-income investments typically provide a lower potential return over the long-run relative to stocks, but they add stability to a portfolio's value since they typically experience less pronounced short-term price swings.🌻

It is very necessary to make sure that your investment is properly allocated into different asset classes to ensure a diversified portfolio. It is extremely essential for an investor to decide their investment horizon to reach their financial goals keeping the factor in consideration as the initial corpus to start with, periodic deposits they can make, expected returns from the asset, the associated risk, and the economic conditions of the market. 🌄

The investor needs to mitigate risk by proper diversification and timely reallocation of funds. In the initial period, the investor can expose a large part of his/her capital towards equity markets because of the higher risk appetite, whereas in the later parts of the investment horizon preserving the capital becomes crucial. Here, re-shuffling of portfolio happens where most of the funds are diverted towards Fixed Income Instruments to mitigate the risk, and the money is more likely to be put in liquid assets. 😃

It is very essential to align your portfolio with your investment horizon! It helps in drawing out your assets and also to determines your exposure to high-risk high-growth potential assets. The distance between you and your financial goal makes a significant difference in what you could and should own. Your investment horizon is the X-factor that influences the asset allocation in one's portfolio. 💥

How does traditional portfolio allocation work? 

Most of their strategies work on default allocation techniques regardless of financial goals. Diversification and exposure to different asset classes are what the focus is on. But the closer you reach to your goals, it is better is to reduce exposure on Small-cap, mid-cap stocks, real estate (illiquid), unsure but emerging sectors, and of course volatile assets. It is indeed necessary to build a tailor-made portfolio according to one's needs, risk capacity, and investment horizon. ⌛

At the time of retirement, say 65, you need to have your money in more liquid and less risky assets. Over time asset allocation will change, and it is unavoidable. The basic definition of risk has to change as you reach nearer to your goals. Investment strategies evolve, portfolio allocations reflect the change that aims at mitigating risk. This strategy might defy the rules of portfolio management as it treats risk as a static thing, but it is important to maximize returns in the initial accumulation years by playing aggressive, and while we proceed towards the later stage of protection, the objective should be to preserve the accumulated wealth by investing in low-risk and liquid assets. After reaching goals like retirement, you lose upon your primary source of income which makes the portfolio management switch on the conservative mode. And, remember the fundamental drivers of the investment decisions you made were your 'Financial Aspirations', and not the fear of missing out on the attractive investment ideas. 🌝

"Conservative investors sleep well."

~ Philip Fisher ✨