 The financial meltdown hit the investors hard mostly because they were hardly prepared for such a crisis. Everything for them - from stock markets to mutual funds and from bank FDs to real estate -- was going great till the crisis surfaced and caught them unawares. However, now as the world economy - to some extent -- seems to be limping back to normal, there are some important investment lessons to help us get through this assault on our personal assets and also prepare us for any future blow.
Here they go: | Do your financial planning |   The reason why many people get into a financial mess is that they neither plan their finances nor do they consult professional financial planners. Financial planning, in fact, requires the thinking through and setting of lifetime financial goals which enables one to determine the appropriate asset allocation required for oneself and one's family.
"Without a plan, people tend to try and 'maximise', returns in each and every investment of theirs and thereby take on more than commensurate risks, thereby endangering the meeting of the goals which ought to have been simple to achieve in the first place," Ashish Kapur, CEO, Invest Shoppe. | | Invest slowly & systematically |  The problem for many people is that they live month to month and they don't develop healthy saving habits until they are in their thirties or forties. Contributions to a savings plan should be recognized as the first of your necessary monthly expenses, so that money saved will never be thought of as money that can be spent.
"Even if you start saving in small amounts now, you can always increase in the future. Investing slowly and on a regular basis makes it easy and ensures that money is saved & kept aside for a more important need in the future," says Lovaii Navlakhi, managing director & chief financial planner, International Money Matters Pvt Ltd. | | Stick to strategic asset allocation |  Though the story is old, it still makes sense to diversify - Don't put all your eggs in one basket. The recent market turmoil, more than ever, challenged this adage. Time and again we will hear from the so-called experts that there is a paradigm shift in the market dynamics and old (read conservative) ways of investing no longer suffices and that investors need to revise asset allocations more aggressively to meet the impending demands of their future lifestyles.
"Advisors and their clients should strictly avoid falling for such traps. Though temporarily the portfolio may appear underperforming, sticking to fundamentals of strategic asset allocation would help investors to come out of the temporary market mishaps. The technology boom of late 90s, real estate & structured product booms of mid 2000s are classical examples of these ill effects. Too much emphasis on select asset classes or within an asset class select sector should be avoided," says Ramesh Patibanda, director - financial planning, Advice America, world's leading provider of financial advisor software solutions. | | Rebalance your portfolio regularly |  Very few investors give much thought to asset allocation and, over and above that, regular portfolio rebalancing, even though it's far more important than picking stocks or funds in determining your investment returns. Even worse, those who do set up a nicely diversified portfolio often forget all about their ideal asset mix once they've made their initial decisions.
"This is potentially bad for your funds, since you're leaving asset allocation to the whims of the market. Often the only time people wonder whether they should have rebalanced is when a big bear market slices more money off their funds than they'd ever imagined possible. Instead, periodically rebalancing your portfolio by selling down winning assets to buy more of cheaper assets which have performed can boost your returns, help keep volatility closer to your own tolerance levels, and reduce the risk of your portfolio being exposed to volatile markets," says Navlakhi. | | Make strategic long-term investments |  At the current juncture, fresh investments in equities and real estate should be aimed strategically to build long-term assets and achieve long-term goals.
"Buying in a staggered way through the systematic investment pan (SIP) or systematic transfer plan (STP) route can help you in sailing through the volatility in equity markets. Try to accumulate fundamentally good stocks in your portfolio after doing a thorough research. Similarly, you can use the fall in property prices to add to your portfolio or to achieve the goal of buying a home," says Kapur. | | Use systematic ways for withdrawals |  Not only while investing, the investors should use systematic ways for withdrawals as well. For example, most of intermediaries and fund houses advice systematic investment into the schemes. However, similar emphasis is not given to systematic withdrawals.
In fact, "the most ideal way is match withdrawals with the expected expense streams. The investors should also consider partial liquidation of their accumulated wealth to initiate new positions in the alternative asset classes like real estate, gold, arts, commodities, etc. Care should also be taken not to skew investment into few dominant asset classes only," says Patibanda. | | Stress testing and scenario analysis |  Most of the advisors, even the well-intentioned ones, shy away from subjecting their plans to stress testing for the worst case situations. "It is indeed highly recommended that advisors prepare their clients for potential situations that could derail their plans. The clients should be made well aware that there could be certain adverse situations that may have unintended repercussions and they should be ready to face those situations and should also have a Plan B to address such scenarios," says Patibanda.
The advisors should depict poor market conditions (worst case scenarios -usually the bottom 10 percentiles in a simulation) as well as average market conditions. This would mentally prepare a client to face such situations when arise. This would also help in retaining clients' trust in the advisor. | | Get professional help |  If you're just starting out planning your finances or your finances are dead simple, you may not need a financial planner. However, if you'd like a second opinion on your portfolio or if you are trying to juggle your priorities like balancing your own retirement with your kids' education and with paying off loans, a professional assessment by a qualified financial planner can help make sure you're on track.
"People have some odd ideas about the role of a financial planner. Many think that these advisers should somehow help their clients consistently beat the market in good times and avoid all losses in bad times. The real role of a good financial planner is to take a look at your entire financial situation and make sure you have an appropriate portfolio given your financial goals and risk tolerance," says Navlakhi.
A planner should educate you about the hazards and rewards involved with investing, advising restraint in the good times and perseverance in the bad. "The crash of 2008 highlighted the effect of no help or bad help. Too many investors who wanted to do it themselves and thought they knew what they were doing learned otherwise. Others thought they were getting good advice when in fact their 'advisors' were just salespeople in disguise, with no background in comprehensive financial planning," he says. | |
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