Investment Risk Management: Strategies for Prudent Investment
Financial markets offer the potential for significant returns, but inherent risks accompany this potential. At Plan Your Money we understand these risks and employ strategies to mitigate them, ensuring the investor portfolios remain aligned with their long-term objectives.
Understanding Investment Risk Landscape
Market Risk: This systemic risk reflects broad market movements, impacting all asset classes due to economic, political, or social factors.
Asset-Specific Risk: Unique to each investment, this risk arises from factors specific to a company, industry, or security. A company's financial performance, industry trends, or regulatory changes can all contribute to this risk.
Liquidity Risk: The inability to readily sell an investment without incurring significant losses defines liquidity risk. Less traded assets or those in illiquid markets pose a higher liquidity risk.
Inflation Risk: Over time, rising prices erode the purchasing power of capital. Investors need to consider inflation when determining investment returns.
Interest Rate Risk: Bond & NCD prices typically have an inverse relationship with interest rates. Rising interest rates can lead to a decline in bond prices.
Risk Mitigation Strategies adopted at Plan Your Money for a Resilient Portfolio
Strategic Asset Allocation: The cornerstone of risk management, asset allocation involves distributing the investor’s investments across various asset classes based on the risk tolerance and investment horizon. Diversifying across stocks, bonds, and alternative investments can help mitigate risk.
Diversification Within Asset Classes: We do not concentrate the investor’s holdings within a single asset class. Diversify further within each class by sector, industry, company size, and geographic location to minimize the impact of asset-specific risk.
Rupee-Cost Averaging (RCA): This systematic investment approach involves investing a fixed amount of money at regular intervals, regardless of the prevailing market price. RCA helps average out the cost per share over time and reduces the impact of market volatility.
Risk Tolerance Assessment: A crucial step involves understanding the investor’s risk tolerance. Younger investors with a longer investment horizon may tolerate higher levels of risk for potentially greater returns. Conversely, investors nearing retirement might prioritize capital preservation and invest more conservatively. However, a one size fits all, approach does not work. At Plan Your Money every investor’s risk tolerance assessment is conducted before staring the investment journey.
Investment Research and Due Diligence: Plan Your Money conducts research on a best effort basis before suggesting any investment to the investors.
Portfolio Rebalancing: Regularly review of the investor’s portfolio, asset allocation is conducted and rebalance it as needed to maintain the desired risk profile is conducted. Market fluctuations can cause the portfolio allocation to drift from the target, so rebalancing ensures alignment with the risk tolerance.
Additional Considerations for Long-Term Success
Long-Term Investment Horizon: At Plan Your Money we adopt a long-term perspective. Short-term market fluctuations shouldn't significantly impact the investment strategy. We focus on achieving long-term financial goals through a well-diversified and risk-managed portfolio
Emergency Fund: We always advise to maintain an adequate emergency fund to cover unexpected expenses. This financial buffer helps avoid selling investments prematurely to meet short-term needs.