Many new investors, or even those with some experience, have lost money during the early stages of their investment journey. Becoming a good investor is above all learning to find a balance between risk and return.
In addition, there are three key aspects to remember: investing is part of your financial planning, necessities such as health and life should be prioritized, and having an emergency fund in place as a fallback option in case something goes wrong. investment would result in a loss. Investing without any research can quickly drain your bank account, so choosing an appropriate asset class based on certain parameters – age, risk appetite, and financial goals is essential. But before we dive into it, it’s imperative to understand asset allocation.
In a word…
Asset allocation consists of building a diversified portfolio by investing in various asset classes. Investing and creating wealth is a long-term process that requires systematic and continuous planning. Choosing an asset class simply on the basis of hearsay without extensive research can be catastrophic. This is one of the main reasons why asset allocation is essential to becoming a successful investor. Even investments that generate high returns can be of little use if asset allocation is not done accurately. Asset classes are often separated into stocks, debt, venture capital, and gold, and these should be broken down into the categories mentioned earlier – age, risk tolerance and financial goals.
Choose the right asset class
Managing your investment portfolio is a dynamic activity that will require regular monitoring, review and changes to get the most out of your investments. Taking a ‘one size fits all’ approach will not work. The asset class and allocation will vary based on financial goals and the investor, and this may differ depending on age groups and their risk tolerance.
For people who are just starting their investment journey, it would be a smart strategy to gradually increase the asset allocation to equities. Additionally, young investors may have a higher tolerance for risk than middle-aged or older investors. It is also crucial to take into account the attitude towards risk and the ability to take risks. Attitude to risk is how comfortable you are with market fluctuations / volatility or a decline in the value of the fund. In contrast, risk capacity is your financial ability to bear a loss if the fund’s value falls. Your attitude and ability to risk will greatly affect asset class and allocation. Simply put, your risk appetite may be inversely related to your age.
Regarding the asset allocation by age, investment risk exposure should be minimized as the investor ages. In terms of investment, the investor’s portfolio will need to shift from a portfolio consisting primarily of equity funds to debt funds and other fixed investments. Investors considering this change may opt for a Systematic Investment Plan (SIP) to help transfer assets seamlessly.
As a rule of thumb, follow the concept “100 – Age of Investor” to determine the appropriate percentage of equity investment that can be in your portfolio. For example, if you are 32 years old, your portfolio may contain 68% equity investments. This can be beneficial for new investors as it helps them better understand asset allocation. Venture capital investment
Apart from the above, venture capital investing as an asset class has gained popularity in a short time. The days when venture capital investing was considered risky and investors were warned to avoid it are long gone. Typically, venture capital investment is made by venture capitalists and angel investors. Thanks to venture capital investment, especially by angel investors and angel investor networks, the startup ecosystem in India has experienced robust growth with several high performing startups. However, like other forms of investing, venture capital investing requires investors to do extensive research on a startup before embarking on investing. Perhaps the best solution would be to be part of angel investor networks where investors can make informed decisions and calculated risks.
Having an appropriate strategy before venturing into the investment landscape will allow you to maintain an optimal balance between risk involved and returns on investment. Remember to consider multiple factors, have a backup plan, choose low correlation assets, and regularly monitor and adjust asset allocation to become a successful investor.
The author is co-founder and CEO of Mumbai Angels