The markets had a great year in 2021. Stocks were up to new record highs, driving investors’ wealth further up. However, with the recent developments in the ongoing global health crisis, investors worldwide grew concerned, and markets entered a significant correction.
The worry and uncertainty carried on in 2022 and resulted in the markets starting the new year on shaky grounds.
While that is the case, there are a few things you can equip your investment portfolio with to give it a better chance at surviving hard times and keep the profits you generated over the years from getting derailed.
Asset allocation is a solid strategy that kept many investors on a steady footing when markets took a sharp fall in 2020. This year is no exemption not to practice proper asset allocation and diversification.
Performing asset allocation according to your risk appetite and financial goals will help you survive volatile situations with less difficulty. It will also balance the risk and reward in your portfolio to ensure that you make enough money from your investments.
Factors to Consider for Asset Allocation
Knowing what you want to accomplish financially will help you decide on a profit target that your portfolio should deliver in a certain period.
You can classify your financial goals under one of the three periods: short-term, medium-term, and long-term. Dividing your goals based on how long it will take to achieve them helps you determine which instruments or avenues are suitable to invest in.
Short-term goals, such as building an emergency fund or taking a dream vacation, can be achieved by investing in debt instruments.
On the other hand, if you want to meet your medium-term goals, like saving enough for an initial payment on a house or a dream car, solid hybrid funds that invest in equity and debt are the way to go.
For long-term goals, such as saving for a retirement fund or your child’s college tuition, putting some of your money into stocks would be the ideal option. This will help generate returns that can fight off the impact of inflation.
Determining how much risk you’re willing to take is also vital to asset allocation. That is why you should always make investments that align with your risk appetite.
Investing in high-risk instruments would not be good for you if you have a low tolerance for risk. On the other hand, having a strong appetite for risky investments can make you better at dealing with a volatile market.
You also need to group your investments based on the amount of time you plan to stay invested to achieve your financial goals.
A short-term horizon is usually between six months to a year. Meanwhile, a medium-term period may require you to invest for at least five years. If you’re focusing on the long-term, you need to remain invested for about 15 to 20 years or even longer.
Betting on equities is a long-term strategy, as they have a volatile nature in the short term.
Unexpected expenses can ruin your financial plan quickly. The global health crisis has taught us how crucial it is to have an emergency fund in place. It showed us that we need to build one by saving and investing properly.
That is where liquid funds can come into play. Liquid funds are debt funds that invest in money market and debt securities with a 91-day maturity period. This type of fund doesn’t have a lock-in period, making it suitable to use as an emergency fund.
With liquid funds, your odds of a loss due to market volatility are low since they mainly bet on debt securities. You can accumulate your desired amount of money through liquid funds with the help of a systematic investment plan (SIP).
Top-Up Health Plan
Health insurance in your portfolio not only helps cover any future medical-related expenses but also protects your savings from the risk of running out. Still, that may not be enough due to the surge in medical inflation. This is where top-up health insurance provides the additional coverage you need.
A top-up health plan can boost your finances. It gives coverage once you use up the amount insured of your standard health insurance. Compared to a regular health plan, you can buy top-up plans easily for a reasonable price. You only need to go for the one that best suits your needs and situation.
Balanced funds are excellent if you’re looking to turn a profit from the stock market but don’t have the stomach for volatility. Similar to hybrid funds, balanced funds can hold bonds for income and equities for growth.
Balanced funds focus on providing broad diversification to a portfolio. Fund managers will handle the asset allocation as they rebalance the fund according to its investment conditions. So investors don’t need to adjust the allocations regularly.
The asset allocation strategy of this fund helps keep investors from making the wrong move due to panic or sudden excitement in the markets. Thus, enabling them to remain objective with their investing.
Moreover, with balanced funds, you gain stability and the potential to generate decent returns. While the returns may be less than what equity funds can deliver, balanced funds are a good investment option for conservative investors seeking financial growth in the long run.
However, before choosing a balanced fund to invest in, remember to review aspects such as its primary holdings and expense ratio. You will also need to do some background checks on the fund manager. That will help ensure that your investment money is in the hands of someone qualified and reliable.
The Bottom Line
The recent developments in the current global health crisis have weakened investors’ optimism and spread uncertainty all over the markets.
Still, equipping your portfolio with one or two or all the things mentioned above can help you better handle your finances this year and ensure that you realize your financial goals and keep your feet on steady grounds.