Turmoil in the current economic environment raises several questions in the minds of investors: Should I exit out of equities? Gold has rallied significantly; maybe that is where I should invest in. With interest rates likely to go up, should I invest in bonds? These and many more questions like these have troubled the retail investor.
What should he do? They say simple things in life are the most difficult to practice and it is the same. Predicting economic parameters like interest rates, inflation or GDP growth among other factors is never easy. Like life, these are also unpredictable. However, one can definitely have an investment plan such that one can have a good night sleep in the present without having to worry about the future.
Diversify: The first and most important rule is to diversify your investments across asset class. One must not put all the eggs in one basket. A certain percentage should be invested in a variety of assets, such as large-cap, mid-cap and small-cap stocks. Put a percentage in real estate, gold and fixed instruments. And yes do hold some part in cash too. Though the risk arising from economic factors would remain, the unsystematic risk, which is unique to the asset class, would be reduced.
The principle of diversification involves investing across options so that losses in some will offset gains in others, thereby reducing the variability of return. It is a risk management technique. The rationale behind this technique is to yield higher returns and pose a lower risk than any individual investment found within the portfolio.
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment