1. A disciplined and methodical asset allocation is the key to financial risk management and control.
2. It starts with:-
a) setting realistic goals at today's cost, with time frames,
b) computing future cost by factoring in inflation,
c) changing investment habit from normal ‘earning – spending = investment’ to scientific ‘earning – investment = spending’, and
d) regular investment through compulsory savings plans and active investment plans.
3. Sticking to a standard asset allocation, based on the formula 100 – age for parking equity for long-term goals, regardless of market conditions, prevents being swayed by crowd psychology.
4. Factors which impact our ability to take investment risk are:-
a) age - to ascertain our capacity to stomach risk,
b) income variability - whether regular or unstable,
c) liabilties - commitments and debts,
d) dependents - if a sole earner for an extended family,
e) past savings and investments - how they are faring, and
f) industry of employment - as it decides income prospects and risk factors too.
5. We should ensure that we hold a combination of assets, so that impact of fall in value of one asset doesn't erode our entire wealth.
6. We should never believe that there are risk-free investments, as risks exist in all, stop predicting future asset prices, avoid searching for best investments, and focus on managing our own portfolio in an active manner.
7. For this, we should have a well-articulated corrective action in place for managing risky events, by fixing our downside risk tolerance level, and admit our judgemental errors as there is no merit in holding on to losing positions endlessely.
8. Instead, the capital released from such positions can be utilized to work elsewhere to recoup our losses.
9. While we assess our abilities by having confidence in them, overconfidence or over-optimism reflects our abnormal faith in them, reflecting our unrealistic, subjective opinion about them, which leads to taking undue risks by ignoring merits of another sound proposition.
10. We can temper our overconfidence by:-
a) making an investment plan by remembering that past performance doesn’t always replicate itself,
b) taking decisions based on rationale, not intuition or optimism,
c) exercising due diligence with sufficient information,
d) selecting products suitable to our goals and risk appetite, and
e) controlling our over-optimism by slashing 25-30% off from our euphoric growth estimates
2. It starts with:-
a) setting realistic goals at today's cost, with time frames,
b) computing future cost by factoring in inflation,
c) changing investment habit from normal ‘earning – spending = investment’ to scientific ‘earning – investment = spending’, and
d) regular investment through compulsory savings plans and active investment plans.
3. Sticking to a standard asset allocation, based on the formula 100 – age for parking equity for long-term goals, regardless of market conditions, prevents being swayed by crowd psychology.
4. Factors which impact our ability to take investment risk are:-
a) age - to ascertain our capacity to stomach risk,
b) income variability - whether regular or unstable,
c) liabilties - commitments and debts,
d) dependents - if a sole earner for an extended family,
e) past savings and investments - how they are faring, and
f) industry of employment - as it decides income prospects and risk factors too.
5. We should ensure that we hold a combination of assets, so that impact of fall in value of one asset doesn't erode our entire wealth.
6. We should never believe that there are risk-free investments, as risks exist in all, stop predicting future asset prices, avoid searching for best investments, and focus on managing our own portfolio in an active manner.
7. For this, we should have a well-articulated corrective action in place for managing risky events, by fixing our downside risk tolerance level, and admit our judgemental errors as there is no merit in holding on to losing positions endlessely.
8. Instead, the capital released from such positions can be utilized to work elsewhere to recoup our losses.
9. While we assess our abilities by having confidence in them, overconfidence or over-optimism reflects our abnormal faith in them, reflecting our unrealistic, subjective opinion about them, which leads to taking undue risks by ignoring merits of another sound proposition.
10. We can temper our overconfidence by:-
a) making an investment plan by remembering that past performance doesn’t always replicate itself,
b) taking decisions based on rationale, not intuition or optimism,
c) exercising due diligence with sufficient information,
d) selecting products suitable to our goals and risk appetite, and
e) controlling our over-optimism by slashing 25-30% off from our euphoric growth estimates