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Multiply Your Income & Earnings Part-3

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The underlying principle of asset allocation being that the older a person gets, the less risk he or she should take on. “After you retire, you may have to depend on your savings as your only source of income. It follows that you should invest more conservatively because asset preservation is crucial at this time in life,” Mr Kapur adds.

The risk-return tradeoff, therefore, is at the core of asset allocation. For instance, it’s easy for people to say that they want the highest possible returns, but simply choosing the assets with the highest ‘potential’ (stocks and derivatives) isn’t the answer.

“The recent declines of 2000-2002 are all examples of times when investing in only stocks with the highest potential return was not the most prudent plan of action. Therefore, what separates greedy and return-hungry investors from successful ones is the ability to weigh the difference between risk and return,” says Mr Vaid.

According to experts, the next step is to determining one’s long and short-term goals. For example, if you’re planning to own a retirement condo on the beach in 20 years, you need not worry about short-term fluctuations in the stock market. But if you have a child who will be entering college in five to six years, you may need to tilt your asset allocation to safer fixed-income investments.

Along with determining your goals, you should also focus on maximising returns while minimising risk, which is the main goal of allocating your assets among various asset classes. Since different assets have varying risks and experience different market fluctuations, proper asset allocation insulates your entire portfolio from the ups and downs of one single class of securities, says Mr Vaid.

Also, once you have chosen your portfolio investment strategy, it is important to conduct periodic portfolio reviews, as the value of various assets within your portfolio will change, affecting the weighting of each asset class. To top it all, determining the proper mix of investments in your portfolio is extremely important.

“However, deciding what percentage of your portfolio you should put into stocks, mutual funds and low-risk instruments like bonds and treasuries isn’t simple, particularly for those reaching retirement age. Imagine saving for 30 or more years only to see the stock market decline in the years before your retirement,” says Kapur.

That’s quite a shiver-inducing thought. The way out? If you are able to play your cards well, you can do it all by yourself or you may take professional help from a financial planner or an investment advisor who can customise a plan to suit your needs as most HNIs are doing these days. After all, what can be a better way to become an HNI than to follow in the footsteps of those already having trod the path!

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