When markets are in turmoil like the current one, investors start to feel desperate. Of course, it is very difficult to digest and remain stoic in these troubled times, especially when our investment of our hard-earned money is drastically decreasing in value (albeit theoretically). Also, when the narrative through it feels like the world is coming to an end, it doesn’t help us think and act rationally.
Markets (of all assets) operate in cycles that could be understood from past data or experience, but they will never be easy to manage. These situations present behavioral challenges for investors. News about the impending deterioration of the future further amplifies the panic and it is in these extremely pessimistic times to hold steady. The psychological pitfalls of market cycles are huge, but how do you avoid them?
This is where an investment plan or financial plan comes in handy. It would be a rational step-by-step approach, where one should consider their purpose, the statement of “why” one is investing. It is said that once you understand the “why” of anything, the “how” is understood automatically. The outline of this vision should encompass the reason for the investment. Most of the time, it also helps to avoid certain investment vehicles because they don’t fit the purpose.
The plan should be versatile and dynamic to changing markets, at the same time should not be too capricious. As the market cycle goes against the grain, has the plan factored these changes into the calculations or is there a plan to counter such circumstances? What happens if the actual numbers deviate far beyond the initial plan, how to react? The first question is challenged to a large extent by portfolio creation, asset allocation and diversification strategy. In the latter case, no amount of predefined strategies work, except the “willingness” of the investor.
Of course, portfolio creation in tandem with an investor’s risk profile not only reduces risk or aligns with the investor’s risk, but also helps provide mental peace for the investor in times of volatility. As the portfolio is less sheltered from shocks, in particular from the psychological point of view of the investor, the latter remains confident of getting through the difficult period. It must be understood that no situation remains the same forever and that nature (the economy) balances itself automatically. Extrapolating extreme states or events would only paint the wrong picture, even if times are good.
Therefore, it is very important to have the justification for the investment before the actual execution. It can sometimes be just as precisely to constitute a corpus for the payment of a deposit on a mortgage or to accumulate assets for retirement. Defining this could help come up with timelines, avenues and therefore asset allocation. All in all, this constitutes the forecast of the investment journey.
Also, the plan doesn’t always have to be perfect, and ideally it shouldn’t. It should be flexible enough to make desired changes while remaining focused on the goal or objective. The plan should capture the imagination of the investment philosophy so that it reflects the best of the investor. This almost truer representation reinforces the attitude towards overall savings and thus leads to a happier investment.
Although the plan is designed to approach various goals, it could be reviewed periodically or as goals change to realign. This ensures understanding where the journey has led so far and how to approach it in the future. In case of deviations, how to maneuver to return to the initial trajectory. By outlining such a process, he would avoid knee-jerk reactions to market fluctuations while being open to reviewing any changes, if necessary.
The role of a financial planner or advisor comes to the fore at those times when they might act as a speed bump in an investor’s train of thought. Investors could be well guided at these times so that they are on the right track to achieve their goals.
(The author is co-founder of ‘Wealocity’, a wealth management company and can be contacted at [email protected])