But I am scared of Equity!

But I am scared of Equity!

During most client financial planning conversations, the financial planning process generates a sort of awakening. For some, its like “blinkers off”, while for some others, it’s like “a huge load off my shoulders”. For some, it’s a scientific validation of their understanding of their finances, while for others, some aspects come as a rude shock. But usually for everybody, the discussions lead to a clear shared understanding of their current financial position, a discovery of what their financial future priorities are and what they need to do going forward to achieve them.

As a part of our conversations, we also transparently share the short-term volatilities that asset classes like equities have, which could lead to a capital loss of even 20-30%, even if temporary. Over the course of our discussions, most customers end up building comfort with various available asset classes, as well as the differences between them. With our help, they also get to know what (and how) they will need to invest in each asset class to achieve which goal, and get comfortable with the risk-return trade-offs of each asset class.

Rarely though, we come across some customers who are quite resistant to the idea of investing a part of their savings into equity, irrespective of how critical it is to achieve their financial goals. When we try to understand more, the following deeper truths emerge

  • I do not want to take any risk, I am very conservative
  • I just don’t understand Equity
  • I have no idea of how the stock market works
  • I am worried that I will lose all my money
  • I prefer to invest in something I understand – like Real Estate or Gold

To many of you, these reasons may sound familiar. So, how can these worries be addressed?

For us, these worries are opportunities for us to understand customers better so that we are able to adapt their investments to their risk appetites in the best possible way, while enabling them to meet their goals. At the same time, it is also an opportunity for customers to understand a bit more about various asset classes, especially the ones they do not know much about, confront their beliefs and overcome their fears.

Irrespective of your mental approach towards decisions, the below rationales should help you to understand and update your beliefs about the risks attached with equity.

  • History shows that while in the short-term, investments in equities are very volatile, in the long-term, a well-selected and adequately-diversified portfolio of equity mutual funds is very safe from a capital loss perspective. The below table illustrates this
  • A significant part of our own portfolio is in equities and we are usually invested in most recommendations to our customers. Our own experiences in investing in equities has been very positive. This also helps build confidence in our customers that we have skin in the game and that our interests are aligned.
  • Many customers who come to us have a significant % of their Net Worth in Real Estate, which hasn’t had a great run in the last decade or so. That being the case, the risk of remaining further invested in Real Estate is higher, and investing in equities not only helps them meet their goals more safely, it also reduces risk in their portfolio through diversification.

As a people, we are used to taking risks in many aspects of our life. We take those risks by managing them better, by constantly building and updating our understanding of the risks and taking appropriate corrective actions, when needed. Our approach to risks in investing needs to be similar.

Equities are an important asset class, arguably the most important from a wealth creation perspective, and much needed for all of us to meet our long-term financial goals. Avoiding Equities due to your fears of them is something that can severely impact your financial security in the future. The better thing to do would be to understand your reasons for fearing equities and seek the correct information in order to overcome them.

Finwise is a personal finance solutions firm that helps individuals and families plan for their financial goals, follow their passions and achieve financial independence. For consultations, please reach us at getfinwise@finwise.in or +91 9870702277/9820818007.

Image by Mediamodifier from Pixabay

You spend across the globe, do you also invest internationally?

You spend across the globe, do you also invest internationally?

One of the key pillars of building a stable yet strong investment portfolio for your long-term goals is Diversification. The objective of diversification is simply to “not put all your eggs in one basket”. Ie. apportion your money across different investments, in order to reduce risk. Conventionally, diversification for retail investors has meant the following –

  1. Invest across asset classes – eg. Equity, Debt, Gold, Commodities, Real Estate
  2. Invest across categories – eg. within Equity – large/mid/small cap, within debt – liquid, duration, credit risk

One key area available for diversification, yet, not taken advantage of by the retail investor is – Geography. Think about it – while we all agree that as a country India has a great long-term future and is one of the fastest growing markets in the world, from a risk perspective, having all your investments in one country – isn’t it another way of “having all your eggs in one basket”? While during happier times your pure Indian portfolio might grow healthily, what about the volatility risks during uncertain times (eg. global recessions, oil prices peaking – haven’t we seen these before?) when global money flows out of emerging markets such as India?

One key factor that large and HNI investors use successfully to not only de-risk their portfolios but also take advantage of global growth cycles is investing internationally. This has many advantages

  • Companies such as Apple, Google, Amazon, Facebook, Netflix – are driving huge behavior and consumption changes across consumers. And none of these are Indian. Investing internationally means having a finger in this pie.
  • Most clients we meet today have a significant portion of their goals planned abroad. Eg. Children’s foreign education, International holidays every few years both before and after retirement, destination weddings abroad. Investing internationally helps you plan for these goals better.
  • While India is a higher-growth market, it is also a higher inflation country, and hence its currency depreciates against most developed country currencies eg. Dollar, Euro, GBP. Investing abroad allows you to take advantage of the rupee depreciating and adds to the gains.

Remember though, investing internationally also has its share of “new” risks that one needs to plan for. Eg. knowledge of global cycles, international geo-politics and its impact as well as currency risks. That said, there are significant investment opportunities available today that helps us invest internationally. More importantly, not investing internationally may be a bigger risk over the long term, keeping in mind the increasing inter-connectedness the world is moving towards.

It is also not something that a retail investor can DIY. It is important to reach out to a trusted financial advisor who can help you sift through and find these opportunities. For our clients, who have anywhere between 10-25 years left for retirement, we recommend at least 10-20% of their investment portfolio should be invested abroad, both to take advantage of global investment opportunities as well as act as a hedge during volatile times.

Going on international holidays or spending on international products – a good part of your expenses goes towards international companies. Then, why haven’t you invested a decent part of your inve/stments in them yet?

Finwise is a personal finance solutions firm that helps both residents and NRIs plan for their financial goals, follow their passions and achieve financial independence. For consultations, please reach us at getfinwise@finwise.in or +91 9870702277/9820818007.

Image by stokpic from Pixabay