Photo by Ivy Son
Last year this time, I remember watching several reels from financial influencers talking about the latest IPO or about crypto and even about going shopping in the metaverse. Now I see the same influencers talking about pension fund and fixed deposit investing. If you bought into the investment opportunities being highlighted last year, in the same adhoc manner in which they were being brought to the fore and are now sitting on losses, does it make sense then to follow the investment opportunities being spoken about, by them, today?
The pattern is unmissable, last year’s euphoria meant talking about the high-risk, high-return investments which seemed to be moving up like there was no tomorrow. This year it’s all about stable returns and safe fixed income investments. If you follow everything, then by now your portfolio looks like a jumbled basket at a fun fair rather than the customised hamper you need to fulfil your life’s goals.
Is it too late for you?
No. It’s never too late. Even if you followed the ‘Make Rs 1 crore in 3 years’ kind of videos and are wondering why the corpus isn’t even halfway there, you are not out of time. Investing does not begin with identifying the product that gives you the highest return, rather it is about understanding how you want your money to work for you.
What is it that you would like to grow your wealth for? If the reply is to have more wealth, you will naturally gravitate to the highest return option. However, keep in mind that high returns are generated thanks to the risk one takes, there is no such thing as a free lunch.
Are you willing to grow your wealth no matter what the risk?
If you’re feeling stuck in an investment that has not worked out as expected, ask yourself these four questions:
- What financial objective are you fulfilling with this investment? Is this the only way you can achieve it?
- What is the risk you are taking? Is the risk too high for your comfort or too low to earn the return you need?
- What about this investment makes you anxious or nervous? Is there any way that this feature of your investment can be removed or overlooked?
- What is the behaviour that made you invest? Did you follow a herd or did you choose based on your goals?
Once you answer these questions, the need for holding on to the investment versus letting go will be clear. If you realise that the investment decision was a mistake, minimise your pain by getting out at whatever value you get. If you realise that what you did sits well with you, but the risk is too high, try to reduce allocation or at least don’t allow any incremental allocation.
How to switch?
So, what we are doing now is taking out those investments from our portfolio, which don’t fit in with our life plan. Do this even if you have to do it at a loss because cutting losses early in poor quality or ill-suited investments is better than holding on and realising further losses when it’s too late and you’re out of choices.
Whenever you consider an investment, the first thought is always – ‘How much will I make?’. This is an incorrect way to begin.
Your first thought needs to be, how much am I ok to lose in this investment and over what period?
Are you ok with losing half your capital for at least 2 years before you see any positive returns? Are you alright to lose 10% of your capital in the first three months of making the investment? Are you ok to lose 7% of the value of your money annually to inflation while making a 5% annual return on a safe and stable return investment?
These are the questions you need to ask first, only after you know the risk can you know what level of return to seek.
If you are earning return solely for the sake of increasing your wealth and with no other specific purpose in mind, like retirement corpus or buying a house in three years or any such earmarked goal, then you only need to understand the level of risk you are willing to accept and move ahead.
Otherwise, you should invest time in marking out the specific goals you want to achieve with your money.
Goals can be varied and each goal may need a different asset or combination of assets to fulfil it. For example, your goal can vary between going on a luxury vacation after 12 months or it could be about your retirement in 12 years. Your risk-taking capacity has to match the time period you are investing for keeping in mind that defined goal.
For example, you may be ok to lose 20% of your capital in the first 2 years of your investment, which is typical equity market risk. However, if the goal you are serving is towards a down payment on a luxury car in 12 months’ time, despite having the risk appetite, equity investments are not the financial investment suitable for the goal.
Coming back to the poor quality investment you made, if it does not suit your future goals and is at a level of risk you are uncomfortable with, cut back now and begin your reinvestment journey. Reinvestment is not hard. Ask yourself those four questions above. Filter out the risk in the investment and understand how much you are willing to absorb and lastly, ensure that you make purposeful investments rather than random attempts at increasing your wealth.
Following your favourite influencer is easy. But managing a portfolio of randomly put-together investments based on their reels is hard. Invest for yourself with the surety of it fulfilling what’s relevant to your life, rather than what’s the hottest trend being talked about.
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So many social media posts today talk about delaying your investments in capital markets in favour of investing in yourself. What does it mean to invest in yourself?
Hugely inspired and slightly borrowed from Rick Kahler, MS, CFP, CFT-I, CeFT, CCIM and his The Financial Therapy Podcast. This video is for Indian investors who are confused about what to do in today’s volatile market conditions and how to make use of the correction. Four Easy Steps to follow for clarity on what you should do.
Last year this time, I remember watching several reels from financial influencers talking about the latest IPO or about crypto and even about going shopping in the metaverse. Now I see the same influencers talking about pension fund and fixed deposit investing. If you bought into the investment opportunities being highlighted last year, in the same adhoc manner in which they were being brought to the fore and are now sitting on losses, does it make sense then to…