Your Money: Money can also be made in a boring, steady way

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March 17, 2021 4:00 AM

Being away from the markets is not an option and being in the markets is filled with uncertainty and volatility. The trade off is too risky. This is where a process is called for and risk management should be the key in every investment management process. And this is where the least attention is paid.

With this experience and knowledge, you as an investor should fare better in the rest of your investment journey.

During the same time last year, the stock markets had started falling because of the Covid-19 pandemic. Investors and their advisors did not know what to expect. Many investors sold stocks fearing the markets would fall more. However, the markets moved up and touched new heights and many new investors started investing in equity.

Meanwhile, bond yields have surged, inflation is inching up and oil prices are surging. The US Fed has released another round of stimulus for around $2 trillion to boost the economy and spur spending. Truly, we are living in a very fluid environment. All of this calls for a process.

Being away from the markets is not an option and being in the markets is filled with uncertainty and volatility. The trade off is too risky. This is where a process is called for and risk management should be the key in every investment management process. And this is where the least attention is paid.

FOMO plays out
FOMO (Fear of Missing Out) has played its role in the last 12 months. So, what should as an investor’s approach be? This is where your liquidity needs, return expectations, time horizon for the cash flow requirements need to be considered. Many of us are not able to distinguish between the ability to take risk and the need to take risk.

It can happen that the need to take risk does not go with your ability to take risk. How can a layman understand and approach this situation? Ask yourself: If a 20% correction (or a loss in the portfolio value) is going to upset your plans, then it is not for you. Taking this forward, if this 20% correction over the next 3-5 years grows and moves up by 25%, does that help?

Short-term volatility
The only difference in the above two situations is the immediate impact in the first one, as one cannot absorb the capital erosion given the short duration of time. As there is more time for the later one, the short-term volatility (and not erosion) can be endured and leading to growth in the coming times.

The process of the markets going up, correcting sharply and then breaching the old levels for a new high—all of that has been experienced in the last one year—which many do not get to experience in a lifetime. With this experience and knowledge, you as an investor should fare better in the rest of your investment journey.

The year 2020 has bought out the importance of asset allocation, time horizon, liquidity, cash flow management and all of this emanates from the risk profile and the risk management of each person. Money can also be made in a boring, steady manner. Having the patience is the key.

The writer is managing partner, BellWether Associates LLP

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