Oct 11 (Livemint) – When it comes to wealth creation making investments sufficiently is not enough, there are few things one should keep in mind to ensure that money grows in time.
Maintain liquidity: First, make sure that there is enough liquidity, it gives protection against a drop in income or loss of income, said Amit Trivedi, personal finance coach, speaker and author of Riding the Roller Coaster.
Apart from that, one must have adequate amount of insurance, both health and life. Because, in absence of liquidity and insurance, people tend to dip into their long term investments.
Asset allocation strategy: Asset allocation strategy is the answer to the 3 questions about risk – how much risk do you need? how much is your ability to take the risk? and how much is your willingness to take the risk?
Once you answer these questions, you get the broad framework for asset allocation – that is where to allocate how much, Trivedi said.
The portfolio can be broken into – 3 or 4 components – based on the horizon. Something that is near term, that needs to be in assets that exhibits lower risk, the medium term would be slightly higher than the short term portfolio and long term portfolio can have higher risk.
Review the portfolio: The moment you do the asset allocation exercise, next comes the review part.
“Over a period of time, any long term goal will turn into a medium-term and then it will turn into a short term goal. And when the financial goal is near completion, the investments needs to be appropriately adjusted.”
Keep monitoring your portfolio periodically.
Portfolio diversification: Despite of doing all the analysis, there is still a possibility that your assumptions might go wrong.
“When I choose to invest in a stock, I choose to do it based on several assumptions about the future of the business. If one of the assumptions go wrong, in spite of all the knowledge and understanding, things can grow wrong,” he further explained.
When you diversify your investments, many of the risks reduce drastically without compromising on the upside.
“When you invest in something, you expect its price to appreciate over a period. Now long term appreciation is not going to be in a straight line. In the short term, they can move in different directions, e.g. when stocks go up, the bonds and gold may go down. That way, your entire portfolio value will remain in a much narrower range. And the fluctuation will be much less visible.”