As investment is a relative perspective, an investor must ensure that wealth is created, capital is preserved and regular income stream is generated in terms of dividend and interest income. While it is a tough job to keep track of all investment options and generate higher returns, the mantra for investments should be based on a time horizon keeping in mind the goal and asset allocation.
The most important step that an investor must take is to break their investments into various time horizons: Short term, medium term, long term and life term. In fact, this has been a trend since long. In the past, buying gold and saving for marriage used to be long-term investment. Setting aside money for education used to be both short-term and mid-term investment, while buying land used to be a life-term investment. The difference is that earlier one did not have multiple options and financial products, which one has today at their disposal.
At present, while some invest with long-term perspective, most look for short-term gains. This again gets influenced by the inputs shared by friends, colleagues and relatives. And then, one pulls the plug. So, before making the decision to buy or redeem the investment ask the basic question: Do I know why I?m making this decision and is there a goal and a time horizon?
Once you answer this basic question, stitch a plan based on the various compartments which we have noted earlier.
Short term (0-2 years): Since the fund requirement is over a period of 0-2 years and liquidity and capital preservation is most important, debt instruments like bank fixed deposits are the most preferred route.
Medium term (2-5 years): Here, one can have a mixture of debt and equity products, and asset allocation, while portfolio rebalancing can be carried out to ensure optimisation of returns.
Long term (5-10 years): It?s similar to mid-term compartment, but here one can be overweight in asset class based on the risk profile and needs. However, one should not get swayed by the interim volatility and bubble. During the tech boom of late 1990s, Warren Buffet stayed away from technology companies. This made fellow investors deride him. However, after the dotcom bust it was Buffet who had the last laugh.
Life term: This is a perpetual investment and you are not looking for redemption in the near future. Buying land/apartment in an area, where you want to live and/or retire. Increasing your holdings in companies which have an economic moat, investing in business ventures, along with the debt and equity options, would constitute your asset allocation. However, do ensure that today the concept of ?buy and hold? is being re-visited and re-tested.
So, all investments will go through this test. If one has categorised investments into various compartments, the road is much clearer and then they can make decisions based on the compartments while doing periodic reviews.
With the global economic slowdown, the days of easy money is slowly coming to an end. The boom in property and stocks in the last decade is now being witnessed in gold and silver. Do remember that a boom is typically followed by a bust.
So, what will help one from going bust is to become fearful when others become greedy, and become greedy when others become fearful. That?s the goldern rule for investment.
The writer is founder and managing partner, Zeus WealthWays LLP