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Time and discipline key to building a perfect portfolio Investing in different economies at various stages of growth makes sense as it is less likely that they will all be affected by global trends at the same time and at the same speed
TERE is a wise saying in virtual ly every culture around world, which in English is summed up by "don't put all your eggs in one basket". It seems simple, but very few investors follow its wisdom and this is the main reason why they don't achieve their intended financial goals.
Diversification won't guarantee you 100 per cent protection against loss, but it will surely reduce your risk. A good financial adviser will not let you gamble with your money, but when you put all your chips on one lucky number, this is exactly what you do. I believe that most people fail to diversify enough not because they don't want to, but because they don't understand what diversification means.
Diversification is related not to the quantity of your investments, but to their quality; leaning towards a low correlation of the assets invested in. Just have a hard impartial look at your portfolio. Do you own three properties in Gurgaon, but little else beside that? Is all your money invested in IT start-ups? How much gold did you buy last year?
To do a complete health check on your portfolio, analyse it along the following criterias:
What asset classes have you invested in? Here we are looking mainly at bonds, stocks, real estate and cash.
Investments in equities bring high potential returns and tend to perform better than most other types of investments over the long term. However, they are also very volatile. Bonds, on the other hand, are considered an asset with the lowest risk, but they will not bring you exciting returns.
If you want to strike the right balance between the two, a general rule of thumb is to subtract your age from 100. The result will give you the ratio you should follow for investment in bonds (your age) and equity (100 minus your age).
When speaking of cash investments, we mostly refer to cash in hand or in a bank account. These are money you must have easy access to.
Ideally, you should always have enough money available to cover at least six months of your regular expenditure. As for real estate — like many American and European investors have learned in 2007 — a smart investor will never put all their money in bricks and mortar.
What sectors have you invested in? If you are a doctor and you believe that the health sector will see a lot of growth in the near future, by all means invest in it, but bear in mind that even the brightest economists can't guarantee which sectors are going to see the maximum growth. Hence, it makes sense to spread your risk across sectors and across various industries within those sectors. If this is a decision you find hard to make on your own, it may be best to put your money into a mutual fund and let the fund managers make those decisions for you.
What is the geographical spread of your investments? While globally India ranks third in terms of preferred investment destinations (just after China and the US), the World Bank revised its growth forecast for the Indian economy in 2013-14 to 6.1 per cent, lower than its 7 per cent estimate six months ago. This is not a problem in itself, because the long-term prospects are still good, and higher economic growth is expected in India next year.
However, a country's stocks tend to move in the same direction. By investing in different economies that are at various stages of growth (developed, developing and emerging), it is less likely that they will all be affected by global trends at the same time and at the same speed.
After you have done the experiment above, you may still resist the need to diversify more. As human beings, we like to think of ourselves as rational, but the truth is we often make financial decision with our heart and not with our mind. We are creatures of habit and we tend to stick with what is familiar and has worked for us before.
Sometimes we just think we know best, despite a different advise received from a specialist. At least this is the theory advanced by many behavioural economists, who try to explain why we don't always make the right investment decisions even when we know what the right decision should be. But if you do decide to diversify more, just bear in mind that it will not happen overnight. It takes time and discipline to build the perfect portfolio for you.
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