After a relentless market rally past few years, investors have still not gotten used to the persistent sagging trend now. They face a conundrum as markets appear like a bottom less pit. In such uncertain times, investors often take a shortsighted view of their investments through the prism of recent market events. It could unnecessarily induce them to take action when none may be required at all.
So, how does one quell the anxiety while looking at bleeding portfolios? The answer lies in financial planning. A financial roadmap helps an investor to look at the big picture and not just the parts on a piecemeal basis. So, investment is just a sub-set of the plan. When mapped to financial priorities as per their time horizon, investments can be segregated into long and short term buckets. The long-term bucket contains investments in growth assets like equity which are volatile and market-linked, where risk can be taken. The short-term bucket contains investments in safe fixed income options like bank deposits which provide stability and liquidity to the money. Based on the goal horizon, the investor becomes crystal clear about the target corpus, when is it required and most importantly, how much risk he should take while investing for it.
The fundamental principle of financial planning is about keeping short and long term buckets separate after an investor figures out his/her financial priorities. This also inevitably helps the investor to strategise and stick to an asset allocation which is in sync with the financial plan.
If a financial goal, which is at least 8-10 years away is mapped to equity, the investor is very well aware that he can take risks and can afford to stay invested in the markets. He has time on hand to grow his investments and ride on the volatility through many market cycles, good and bad. Further, if he is underinvested in the equity bucket as per his allocation and his goals require him to invest more, he clearly knows, it is a good time to build the target corpus. Financial planning is an ongoing process and periodic reviews help the investor to stay on track, reminding him about his status quo on financial goals.
Such holistic thinking does not take a myopic view on markets, returns and chasing alpha. The ultimate benchmark of success for the investor is achieving the goal. Simply put, when the time comes for funding the goal, he should have the money available on him.
The chances of confusion and anxiety are more in taking investment decisions when the investor is clueless about what is he saving and investing for. A lack of focused approach and the single-minded purpose of chasing returns falsely encourages the investor to take excessive risk beyond his appetite in rising markets. And, increases the chances of knee jerk reactions when the tide turns, which is again detrimental to the investor’s wealth.
Having a financial blueprint in place thus provides pristine clarity, nudges investors in the right direction about their financial priorities and take calculated risks with their money only where it is required. Its importance cannot be underscored enough as it assuages fears during these unpredictable and uncertain times. This is where a professional and competent financial adviser helps to add value on an investor’s long journey of wealth creation and financial stability.