Key Wealth Creation Strategies for Volatile Times

While investors need to face periodical drawdowns, active ones can take advantage of volatility

Key Wealth Creation Strategies for Volatile Times
Key Wealth Creation Strategies for Volatile Times
Prateek Mehta - 13 June 2021

Volatility is inherent to the exercise of investment. The aftershocks of Covid-19, feeble corporate earnings, FII exits and re-entry, resurfacing US-China trade issues, vaccinations and regulatory actions towards restarting the economy, etc. are just some of the factors that will contribute to the impending volatility.

For most long term investors, short term volatility is often noise that can distract them from their investment goals. Staying invested for the long-term to gain from compounding, risk mitigation through diversified asset allocation and using a systematic investment approach help creation of resilient portfolios.

While investors need to brace themselves for periodical drawdowns in the conceivable future, the active or pro-active investor can use volatility to their advantage. Here are three strategies that can ensure that your portfolio continues to make gains even when times are tough.

Goal-Based Investing

Goal-based investing is a fundamental tenet for long-term wealth creation. With a clear set of financial objectives, it becomes easier to identify relevant investment instruments, basic risk tolerance, investment horizon and financial goals. The strategy enables you to create smaller investment buckets within the larger portfolio that can be managed independently.

Your portfolio of investments is supposed to solve for your aspirations. A part of it is supposed to help you pay for the down payment of a house two years down the line, some of it to fund your child’s education 10 years away, while the rest is for your retirement 25 years from now. The capital erosion in the event of persistent volatility will affect your ability to fulfil all your financial goals and may force you to compromise on some goals or find alternative sources of funding.

This can be avoided with different goal-based investment buckets. If each of the aforementioned objectives were managed separately, there would be sufficient insulation from volatility and investment risk. The corpus for the near-term goal can be moved to debt funds to avoid swings in value. A part of the funds for children’s education can be invested in International funds especially if you have the aspirations of a foriegn education for your child. As you get closer to the date(s) of actual utilisation, transfer to liquid funds in a calibrated manner.

Investments towards retirement corpus can be continued via SIPs into good large cap and multicap equity funds. Do not move everything to low risk debt or fixed deposits when you retire. The corpus is supposed to support you through your retirement. Given the current life spans and access to healthcare, you will need to plan for the late 80s/ early 90s. It would be imperative that you hold upto 5-7 years of expenses in debt funds and the rest in equity, so that your nest egg can support you through your retirement years.

Manage your Asset Allocation

When you invest, you end up investing in something that belongs to one of the following asset classes:

1. Equity - shares and stocks, ETFs, Equity Mutual Funds

2. Debt or Fixed income - FDs, RDs, Bonds, Debt Funds, NCDs, PPF

3. Precious metals - Gold, Platinum, Silver

4. Real Estate - Commercial or Residential properties and land

5. Others - Forex, Cash, Art or Crypto

Most financial wealth is invested in the first two. Both asset classes are needed for different needs and depending on the objectives and time horizon, allocation also varies.

This split of your wealth between multiple asset classes - how much in each is generally known as asset allocation. The aim is to stay invested in the right asset class to generate a required growth rate, for the right need and with the right amount.

Your SIP investments will let you take advantage of Rupee Cost Averaging i.e., buying regularly at dips to lower your overall purchase costs. Having a target asset allocation between debt and equity, will let you acquire more equity when the equity markets correct and vice versa. This helps your chances of deriving more value from the investments.

Asset rebalancing is a periodical exercise, wherein the investor seeks to maintain a predetermined debt-to-equity ratio for the overall portfolio. In the event the proportion of an asset class deviates from the targeted allocation, a corrective action by shifting funds from one asset class to another is undertaken to revert to the original allocation.

The strategy allows investors to book profits from equity (when markets are doing well) and reinvest the redeemed funds into less volatile fixed income instruments, thereby enhancing the overall stability of the portfolio.

Take Expert Advice

Investing is often complex and bewildering. This happens because, as investors, we always have incomplete information, inadequate time and are given to overreact to our anxieties.

Taking the help of a good wealth expert, helps you manage your asset allocation, invest in the right products and keep your finances organised. Most importantly, an expert will help you manage your portfolio and keep your emotions/ actions in check. Often, good outcomes are not achieved because of knee jerk reactions to upward or downward movements in the market.

Volatility is an integral part of the act of investing. It cannot be wished away but it can be managed and navigated. The path to financial freedom is mired with short term and long term volatility. Be patient, have a long horizon and take help. It is really that easy!



The author is Co-Founder and Chief Business Officer, Scripbox

DISCLAIMER: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.



Advertisement*