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As the global economic turmoil intensifies, we have been seeing increased volatility across global markets, which is not limited to equity markets but spread across asset classes. In such an uncertain scenario it becomes imperative that you reassess your portfolio to ensure that it is on course to meet your long term goals and dreams and in case there is corrective action required, it is taken without delay.
In this section we will talk of 5 ways to ensure that you ride this tide of volatility unscathed and your dreams and goals stay within your sight.
Diversification is spreading your investments across asset classes to ensure that you are not exposed to just one asset class; simply put it's about not putting all your eggs in one basket.
Invest in a range of assets
Building an effective mix of stocks, mutual funds, bonds, cash, real estate and other assets can help reduce the volatility in your portfolio and potentially result in more consistent returns. Not all assets perform in a similar fashion from year-to-year. For example, bonds may generate positive returns in a given year when equity mutual funds are down (this may not always occur, but it has happened historically).
Beyond conventional investments
Depending on your circumstances, you might consider owning more than just conventional mutual funds. It might be appropriate for you to consider corporate FDs, equity linked debentures or private equity depending on your goals, time horizon and risk appetite.
Rebalance your portfolio regularly
The current market turbulence makes it even more important that you review your portfolio frequently and rebalance it when needed. Rebalancing requires that you book profits when an investment is performing particularly well, and reinvest those proceeds in an asset class that has been underperforming. While this may seem counter-intuitive, it can make your portfolio less sensitive to market fluctuations in the long run.
Agoal of portfolio consistency
One goal of rebalancing is to put more money to work in asset classes that could be poised for a recovery. The other reason is to manage risk. If an asset class like equity becomes overweighed in a portfolio, you may be taking on more risk than you originally planned for. Rebalancing allows you to make non-emotional decisions to buy low and sell high. This technique helps you maintain investment discipline, manage risk and keep emotions in check.
Rupee cost averaging
Volatility could be a good time to invest additional rupees toward your goals with an investment approach known as rupee-cost averaging. The concept is simple - put money into investments on a regular basis, regardless of market conditions.
Rupee-cost averaging into a declining market
With rupee-cost averaging, when prices are low, your investment purchases more shares or units. When prices rise, you purchase fewer shares or units. Over time, the average cost of purchase will usually be lower than the average price of those shares or mutual funds. It's a disciplined way to keep saving despite market volatility.
Avoid emotional investing
Expectations of how the market or your investments will perform can drive emotions that affect decision-making. Emotions, in turn, can drive behaviour. "Non-emotional" decisions about your portfolio are therefore need of the hour. However, that is not always easy to do when markets are fluctuating the way they have been in recent months. Strategies like diversification, rebalancing and rupee-cost averaging are investment disciplines that allow you to make "non-emotional" decisions about your portfolio.
Emotions driven by expectations
As the market rises, optimism about the markets grows to excitement, and sometimes outright euphoria. Asimilar pattern occurred in the late 1990s, when the "dot-com bubble" caused a huge spike in the market and investors put much of their money into stocks. But when the market begins to decline, emotions ranging from anxiety to depression follow the market to its low point. It is difficult to know when the exact bottom occurs, but at some point optimism returns and the cycle repeats.
Avoid market timing
It can be tempting to react to market volatility by trying to time the market. But effectively timing the market requires you to make two correct decisions that are very difficult to make: exactly when to buy and exactly when to sell. This is a risky game to play. Being out of the market at the wrong time - even if it's for a short period, can cost you significantly. For more information visit @ http://www.ameriprise.co.in