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Overview | Knowing yourself | Asset Allocation and Diversification | Rebalancing and Monitoring

With any building project, it's important to have the right tools and components. Investing is no different. Once you have collected funds for investment, you need to then do a personal diagnosis of yourself to understand your investment needs, your investment goals and how would you approach to achieving those goals.
Knowing yourself


Know YourselfInvestors who try to make money come from diverse backgrounds and have different needs. It follows that specific investing vehicles and methods are suitable for certain types of investors. The more you know about yourself the better you will be able to design a strategy that can customize to your unique needs.  At this learning centre, we will be covering certain factors you must know before you make a decision to invest money.  These are:

Understanding Yourself

Investment Goal - one of the most important factors to consider

Whether you're a novice at investing money outside your own business, or a seasoned investor, it is important that you first consider your investment goals before you put your money for investment. As is the case with most things in life, it's hard to know what to do — and to evaluate how well you're doing it — unless you have a clear idea of what you're working toward. Therefore it is important to ask yourself what you are trying to accomplish with the investment, by when, and in exchange for what level of risk.

It will help you to know what kind of return you will need to receive on a particular investment.  If say for example, your investment goal is to collect fund for your daughter’s wedding then you would have an idea how much money you would need to make the goal a reality. However, what is your time horizon will also play a crucial role in determining what investment is right for you i.e. whether you daughter’s wedding is in 5 years or 20 years. So if the wedding is in 20 years, you can seek for an investment that will grow over time but you can afford to take some risk.  Take a look at the five investment objectives below and find the one that most closely matches your goals.

Income with Capital Preservation: This is the most conservative objective - you're looking to keep your initial investment (capital) safe and receive some current income. Investments that provide income with capital preservation generally do not promise growth and are therefore relatively safe. If your time horizon is short and/or you're risk averse, income with capital preservation may be your investment objective.

Income with Moderate Growth: If you'd like some current income, but would also like to see the value of your initial investment increase conservatively, then "income with moderate growth" describes your objective. Investments with income and moderate growth as their goals appeal to people with low risk tolerances and short to intermediate time horizons.

Growth: Investment vehicles focused on growth take time to generate returns and are suitable if you have high risk tolerance and have an intermediate or long-term investment horizon so that you can weather any short-term fluctuations.

Aggressive Growth: Investments focused on aggressive growth aim to provide a higher-than-average increase of your initial capital investment. A higher-than-average rate of growth, however, translates into a higher-than-average risk. If you can tolerate that risk and have a long-term investment horizon (the longer the better), such an investment may be appropriate for a portion of your portfolio.

Time horizon tells us exactly the time for which our money stays invested

Time Zone"Time horizon" refers to the amount of time you plan to hold onto an investment. When estimating a time frame for your investment, you should consider When will you need this money? Do you need it for your children's college education, for your daughter’s wedding, to purchase a car within a year or for your own retirement? Deadlines like this play an important part in determining which product is right for you. And remember, as those deadlines approach you'll need to reassess your portfolio periodically and make adjustments as necessary.

The longer or greater the time invested, the less is the risk that can be assumed with the investment.  This is the basic question to ask yourself about a particular investment. As a general rule, the shorter your time horizon, the more conservative you should be. For instance, if you are investing primarily for retirement and you are still in your 20s, you still have plenty of time to make up for any losses you might incur along the way. On the other hand, if you are about to retire, it is very important that you either safeguard or increase the money you have accumulated. Because you will soon be utilising your investments, you would not want to expose all of your money to volatility - you don't want to risk losing your investment money in a market slump right before you need to start accessing your assets.

Risk tolerance is the next factor that must be understood

So what’s your investment style? Do you love fast cars, extreme sports and the thrill of a risk? Or do you prefer reading in your hammock while enjoying the calmness, stability and safety of your backyard?

How much risk are you willing and able to accept? Risk tolerance is determined by your personality, age, job security, health, net worth, emergency fund, and the length of your investing horizon. Peter Lynch, one of the greatest investors of all time, has said that the "key organ for investing is the stomach, not the brain." In other words, you need to know how much volatility you can stand to see in your investments.

It recognizes the fact that certain people have an aversion to risk and will suffer psychological consequences for having their money in certain riskier investments.   If you are one of these people then you should probably avoid the riskier investments.  Understand how comfortable you are with risk and how comfortable you are with seeing the value of your money go up and down on a regular basis.  For some this is not an activity that is conducive to peace of mind. Peace of mind should be your first goal in any activity, so avoid anything that disrupts your peace of mind.

Your Personal Traits also play a great role in determining your investment

Your financial position also affects your objectives. A multi-millionaire is obviously going to have much different goals than a newly married couple just starting out. For example, the billionaire, in an effort to increase his/her profit for the year, might have no problem in setting aside Rs 1 crore in a speculative real estate investment. To him/her, it might be just a small percentage of his/her overall worth. Meanwhile, the couple is concentrating on saving up for a down payment on a house and can't afford to risk losing their money in a speculative venture. Regardless of the potential returns of this risky investment, speculation is just not appropriate for the young couple.

Other personality traits like trust, confidence or lack of it, pride and greed also enter into the equation and will impact on what investment would be right for you.