Are you following the right investing strategy for your financial goals? Many people swear by the buy-and-hold approach, claiming it outperforms active trading. But before you jump on that bandwagon, let’s dive into the nuances and find out why it might not be the best fit for your goals.
Understanding Terminal Wealth
Okay, what’s terminal wealth? Imagine it as the magical amount of money in your investment portfolio when you reach your financial goal. Whether it’s for your dream home, your child’s education, or a comfortable retirement, your terminal wealth must match the target you’ve set.
Your goal-based portfolio is likely a mix of stocks and bonds. Bonds are like stable-income options, similar to a cozy bank fixed deposit. These are pretty safe. But then there are stocks, which bring in more risk. If your portfolio falls short of the expected return, it’s usually the stocks’ fault. That’s why managing the risk tied to your stock investments is a big deal.
The Power of Compounding
Now, let’s break it down. Say you invested Rs 10 lakh last year, and it grew to Rs 11.8 lakh this year, giving you a sweet 18% profit. But what if the market takes a nosedive amid geopolitical tension, say, by 10%?
Well, brace yourself because you could lose all those gains! This is where the rubber meets the road. If your financial goal has a 10-year horizon and you need a 15% return on your stock investments to hit the target, any shortfall can snowball into a goal-ending disaster. So, here’s the kicker: you need to keep an eye on your stock investments and adjust them periodically.
The Re-Balancing Act
Re-balancing sounds fancy, but it’s about tweaking your stock allocation to control risk. It’s not rocket science, and it’s a crucial part of goal-based investing.
Here’s a simple strategy: when your stock returns exceed 1% in any given year, pocket the excess and invest it in fixed deposits. This way, you’ll seize those additional returns and move closer to your financial goal.
In the example we discussed earlier, instead of the expected 15% returns, the investor received an impressive 18% return. In this scenario, it’s wise to pocket the extra 3% and invest it in fixed instruments.
But what if your stocks don’t perform as expected? Well, that’s when you Goal Based Investingmight need to inject extra money into your investments. Your salary bump or the interest from those fixed deposits can help cover the gap. The bottom line? A buy-and-hold strategy might not cut it for your financial dreams. Managing risk is the name of the game.
So, are you ready to supercharge your goal-based investments? Time to steer clear of the one-size-fits-all approach and take control of your financial destiny!
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.