Investor resilience and wealth management go hand in hand

One of the key areas of focus in this year’s World Investor Week is investor resilience. The World Investor Week, celebrated from Oct 10 to Oct 16, is a global campaign being held to raise awareness about the importance of investor education and protection and to highlight the investor education and protection initiatives of securities regulators. It is an initiative of the International Organization of Securities Commission, which is an international body that brings together the world's securities regulators and is recognized as the global standard setter for the securities sector.

Money management is a lifelong commitment that has many variables involved – economic and market conditions, changes in vicissitudes in life and shifting goal posts to name a few. Amidst all these, keeping your investment strategies in sync with your risk-taking abilities and objectives can be a challenge. The IOSCO has listed the following narratives which are crucial for investor resilience

1. Emergency fund for rainy days: No amount of crystal ball gazing can ever prepare us fully for exigencies in life. Be it illnesses, accidents, the sudden death of a loved one or sudden income loss – financial preparedness in the form of a solid emergency fund can make it easier ton deal with such situations and also ensure that you have timely access to appropriate resources in times of need. Emergency funds should have a corpus big enough so that it can sustain your expenses for at least 6-8 months. Not paying attention to building an emergency fund can affect other areas of your finances when the going gets tough and it may take longer for you to heal your finances.
2. Acknowledgement of the risk factor: A sizable chunk of the investor population tends to gravitate towards risk-free investment avenues for the majority of their goals. However, this approach towards investing is flawed and significantly impedes your wealth creation in the long run. Investments that carry risks are crucial for staying ahead of inflation in the long run and maintaining portfolio diversity. Investments should be made after considering whether a particular investment avenue is aligned with your risk-taking abilities. An understanding of the risks associated with different kinds of asset classes will help you maintain a resilient portfolio.
3. Diversification is the cornerstone of a successful investment strategy. However, as is the case with most things in life where balance is paramount for achieving perfection, portfolio diversification too has to be maintained at optimum levels. Diversification ensures your portfolio does not remain confined to one asset class. The right asset allocation strategy helps you tap into opportunities wherein it flattens out any spikes in the risk element because a shock wave in one category gets absorbed by another.
4. Budgeting for life’s unexpected challenges: Adherence to a strict budget makes it easier to efficiently manage you monetary resources. When you are in the habit of budgeting, you would be able to minimize frivolous expenses, save enough for investments and your emergency funds and avoid debt traps, especially high interest ones. A solid budget is the first stepping stone to healthy finances because it is only when you can follow a budget, that you can set aside a body of savings diligently which can be channelized into investments for your goals. Budgeting also helps you navigate finances in a smarter way when the inflation pinch gets too much because with a budget you would be able to steer clear of extra expenses that would otherwise add to the pinch.
5. Keeping inflation in the big picture: The worthiness of any investment instrument, especially long term ones, depends on its ability to generate returns that are higher than inflation. When choosing an asset class for investment, it is important to factor in the inflation adjusted returns that the asset can generate in the short, medium and the long run. Inflation can significantly erode your corpus and add taxes to the scenario, your actual gains from the investment can pale significantly.
6. Staying vigilant: A successful investment journey is rooted in an investor’s quest to keep learning about the external elements that affect his/her investments and the ever-evolving trends in the financial space. A mindful approach to money management can help you sidestep investment avenues that may not be suitable for you. Also, adequate financial knowhow can also prevent you from falling victim to financial fraud and trickery.

The COVID-19 pandemic was a test of the resilience of investors and it also brought forth many lessons that the investor community had to learn.

Many investors who entered early in the market during middle 2020 tasted success and built their portfolios, the rise in the indices was so secular and broad based that there was no correction and investor patience was never tested. Major and sustained bull markets also carry a risk, investors tend to forget that there can be periods of correction and consolidation, wherein you either give up part of your gains or see no returns for some time. For investors to sustain in the long game, it is important to develop the foresight to differentiate between situations where an exit is warranted and those which are knee jerk reactions.

Action points

• Start reading on personal finance topics online if you are new to the world of money management and speak to experts to help you develop an investment plan. Never follow strategies suggested by friends and family.
• Do not overlook the importance of insurance in maintaining the health of your finances and the future of your loved ones in the long run.

Disclaimer: An Investor education and awareness initiative of Aditya Birla Sun Life Mutual Fund.

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This article is part of the HT Friday Finance series published in association with Aditya Birla Sun Life Mutual Fund.