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Wednesday, March 21, 2012

What Is your investment approach ?

With the financial year about to end, most investors will be reflecting on their investment plans. If you don't find yourself any closer to your financial goals, it is imperative that you evaluate your investment decisions. Here are a few pertinent questions you may want to consider while reviewing your investments:

Are investments helping achieve your dreams?

The first and foremost step is to define your goals. Many a time, investors do not map investments according to goals. Even if they do, few translate these to numbers. It is vital to remember that your investments are merely the means to realising your dreams. For instance, if your objective is to purchase a car a year later, you should be conservative in your approach due to paucity of time.

However, if you are planning for your retirement (twenty five years away), you can afford to invest in instruments that would give you better returns over the long term (though these could be risky in the short term). Losing sight of your goals may lead to ill-suited investment decisions.

Have you created a long term financial plan?

A financial plan that puts all your investment goals on one canvas will empower you to make informed decisions tailored to your financial situation. The relevance of a financial plan is truly understood when you start to lay out your entire financial future in perspective. For instance, you may want to buy a car in one year, take your family for a vacation every year, buy a dream house in five years, provide funds for your children's education in eight years and plan for a comfortable retirement in twenty years. Now, each of these goals may be equally dear to you, however a comprehensive financial plan would allow you to prioritise and invest accordingly. Your investment vehicles could differ, as the underlying factors for each goal are different.

Have you invested keeping in mind your risk profile?

A vital element of a successful investment approach is to understand your risk appetite. Risk can have different implications for different individuals. While we all intuitively want high returns, some of us do not have the appetite to bear the downside that may come with high-return (high-risk) instruments. Always dig deeper to understand what you are getting into and the possible risks associated with it. For example, lured by attractive terms, you may not want to park funds in an exotic investment product, without fully understanding the implications or your ability to absorb the risk.

Do you understand your investment products?

Did you purchase a product just because your friends made money on it? While its good to be aware of what others are buying, remember your financial decisions should be based solely on your financial situation. Interestingly, according to a recent market research conducted, Investment decisions are often influenced by the geography in which one lives and the people one regularly interacts with.

Have you allocated your wealth across asset classes?

Spreading your investments across asset classes is one of the most critical factors in determining your portfolio performance. By dividing your investible surplus among asset classes that do not respond to the same market forces in a similar manner, you may be able to minimise the effects of market volatility and maximise the chances of return in the long term. You would benefit from unbiased advice provided by a financial planner. It is critical to decide the liquidity you require. The sooner you will need your money, the wiser it is to keep it in investments with lesser volatile price movements.

Therefore, the most important aspect in making an investment decision is to follow a structured plan, developed keeping in view the long- and short-term goals. Also, be prepared to meet the uncertainties that may arise in life.  
 
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