The root cause of the problem, besides his portfolio, was his way of managing his money. After all, looking at the screen for several hours will not change the value of the stock. Yet, people who are not traders are fixated on every happening in the market and look at their portfolio every now and then.
“Suppose you board a train with the objective of getting down at the last stop. You see a lot of people getting out at the fourth stop. Would you start asking your fellow passengers why they are getting down and then, get down with them?” “Why is it that most of the people do this when it comes to their investments. They call up a news channel and ask I have stocks of this company. What should I do? Why did you buy it in the first place?” The general principles of investing are always simple and not as complex as they are sounded to be.
Just looking at the portfolio will not change its value, but could certainly compel you to act. Emotional acts are hazardous to one’s portfolio and hence, one should always refrain from making ad hoc buy and sell calls. Always have rules set on what you want to buy, why you want to buy, when you want to buy and when you want to sell. It is easier said than done, but implementing these rules is in your best interests. Before you build your portfolio, it is very important to understand your liquidity needs, financial goals, time horizon, risk profile and overall situation. It is only after a thorough assessment should you arrive at your asset allocation.
In simple terms, asset allocation is spreading your money across a mix of asset classes namely bonds, real estate, equity (direct stocks, mutual funds), gold and cash. “In fact, without asset allocation, every investor is exposed to various risks such as inflation (when you create an all bond portfolio), market risk (when you create an all equity portfolio. Additionally, without asset allocation, the decisions to add products to a portfolio are usually done in an ad hoc manner based on return expectations alone.
The best way to explain and drill the importance of asset allocation is to use an analogy from the fitness world. Mantra to great health would be to EAT a balanced diet with the right mix of essential proteins, carbohydrates minerals and vitamins and EXERCISE. Mantra to great wealth is all about having an asset allocation and exercising your money.
The author, a certified financial planner, is director, My Financial Advisor
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