5 New Year Resolutions To Help You Build Wealth through Equity - Outside View by PersonalFN

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5 New Year Resolutions To Help You Build Wealth through Equity
Dec 29, 2016

As we enter 2017, you probably have your New Year resolutions figured out. Some of you may have committed to getting fit, eating better, reducing your time spent on social media or other self-improvement goals. The list can just go on and on.

While New Year resolutions are a good motivator, they tend to be notoriously hard to keep. Think about the resolutions you made for 2016 or the year before that; were you able to achieve what you had set out to do?

Every goal you set requires a plan to reinforce it and to keep you on track. You may have even thought about improving your finances in the New Year: to save more and spend less. While this is a good start, unless you quantify it and set an actionable plan, you will be far from achieving your financial goals.

As 2016 ends, it is a good time to review your finances and set goals. Some of you may have been disappointed with the performance of your portfolio in 2016 as equity markets were extremely volatile and ended with meagre gains. However, you should not be worried about the short-term performance of equity. Now is a time to realign the portfolio and set out to achieve your financial goals. PersonalFN has defined five New Year resolutions you should keep in order to prudently build wealth through equity.

Resolution #1: Set a financial plan

All investment activities should begin with a financial plan in place. This helps in achieving the vital goals you may have envisioned viz. buying a dream home, a car, providing for children education and marriage needs, planning a vacation, your retirement, amongst a host of others. Financial planning requires you to review your existing savings and investments, define the asset allocation prudently, define SMART (Specific, Measurable, Adjustable, Realistic and Time-based) financial goals, and create a clear roadmap to achieve your many aspirations in life. Besides, it even helps you plan for the worst while you hope for the best - meaning, set aside a contingency reserve and insure optimally. And if all this is too complex for you, do not hesitate to hire a Certified Financial Guardian.

Resolution #2: Start a SIP towards financial goal(s)

The volatile market conditions may tempt you to invest or withdraw your investments in equity. However, do not base your investment decisions on extreme exuberance or panic. Avoid timing the market and making ad hoc investments in equity; it can be hazardous to your wealth and health. In a volatile market environment, it is best to stagger your investments. Once you have identified your long-term financial goals, do not hesitate to start a Systematic Investment Plan (SIP) in winning mutual fund schemes that suits your investment objective risk profile, and the financial goals. A SIP helps you to absorb the shocks of a volatile market, and instead of committing a lump sum; you can invest smaller sums every month. SIPs instil discipline (as you invest regularly) and provide the benefits of rupee-cost averaging and compounding.

Resolution #3: Invest as per your risk profile and investment horizon

When investing, ensure that you do not expose your portfolio to undue risk. The stock market is extremely volatile over short timeframes. If you have short-term goals of one to three years, you should ideally avoid investing in equity. Invest in equity only if you have a high tolerance for risk and if your investment goal is over five years away. If you are a novice, or if you can only tolerate moderate levels of risk, prefer balanced funds. The higher exposure to debt in a balanced fund would act as cushion in volatile market conditions. Based on your risk profile, an optimal asset allocation between equity, debt, and gold should be charted.

Resolution #4: Diversify your equity investments

Diversification is one of the basic tenets of investing. You may have heard many saying, "Diversify, diversify, and diversify!!" It's been widely talked about. Effective diversification can help in reducing the risk to your portfolio, thus making it resilient. Merely investing ad-hoc across variety of investment avenues is not effective and cannot add value to your overall portfolio. You need to be cognisant of your investment objective, investment horizon, risk profile, and financial goals, for diversification to be effective. You could diversify across assets (based on the asset allocation that's best suited for you), as well as across investment avenues, time frames, issuer of securities, countries and so on.

When you invest in equity mutual funds as well, it is prudent to invest in a mix of mutual fund schemes based on their market capitalisation bias and the investment strategy mandated to follow. This will help you sail well in the journey to wealth creation. For example, large-cap oriented funds tend to be stable in a volatile market. However, when the market heads higher, the returns from large-caps are subdued. Likewise, mid-cap funds can suffer heavy losses in a market downturn; but in a bull market the returns get accelerated. Value funds on the other hand, offer better risk-adjusted returns. Therefore, you need to allocate your funds in such a way that you get a mix of stability and growth.

Resolution #5: Be patient; remain focused on your financial goals

Many invest in equity with the expectation of quick returns. Equity investing is not a "get-rich-quick" scheme. It requires a lot of patience. Just because the long-term average returns from equity funds is in the range of 11%-14%, it does not mean you will earn a steady return of around 12% each year. In some years, you may suffer a loss of capital, while in other years, the returns can be overwhelming. The markets may even remain directionless for years as seen most recently over the period from 2010-13. Those who held on to their investments would have benefitted from the rally that ensued. Thus, patience is the key to long-term wealth creation. The best way to stay on track is to keep focussed on your financial goals.

PersonalFN believes that these New Year resolutions will help you to get closer to your financial goals. If you feel this is beyond your expertise, or you do not have the time to manage it; then do not let your financial health suffer. Hire a Certified Financial Guardian and get your investments on track. Certified Financial Guardians (CFGs) or registered investment advisers do a detailed study of your financial goals and can create a customized financial plan according to your requirement, giving you the right direction to achieve each of your financial goals.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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