Bech de kya? How to answer this question in stock market

The phone rang. And I was not surprised. This name always lights up my phone screen when the market hits a new level – high or low. And the question is always the same.Let’s call my friend Mr B (no, he is not the Mr B, though I wish I had access to the Shahenshah). Mr B is a very well-educated and successful professional, who ticks all the right boxes. The right attitude, the right education, right corporate to take care of work-life balance, and even the right genes. You guessed it – Mr B is part of the gujju madu crowd, who are blessed with an innate sense of money. Although we have been friends for decades, we rarely speak to each other on a regular basis. We rarely meet given the geographical distance between us. Interestingly, he never fails to call me during the agonies and the ecstasies of the market. He called in September; his voice betraying his panic asking “bech de kya?” Yesterday, he sounded in an exuberant mode and asked the same question – “bech de kya?” My answer to his query both times was “pakad kay rakho, becho mat.” I could confidently answer Mr B’s question because I knew his risk profile and general attitude or, if you please, his lifestyle.And given our relationship for ages, I had some idea about his income-expense matrix, though such things are never discussed openly even between friends. The correct way to approach the situation is to look at your risk profile, need of funds and asset allocation. If you are the daredevil 100 per cent equity person and have no need for funds, lucky you, then do nothing. I can’t predict what will happen on May 23, but whatever it is; you have seen such volatility before. Just sit through that phase. This too shall pass. One should look at asset allocation at a portfolio level. List down all equities you have, whether direct or through mutual funds and do the same for your debt investments.Debt instruments are these days not as safe as they are thought to be. Keep at least six months’ monthly expenses as emergency funds. Also, deduct your best estimates for lumpy expenses that are expected over next 12 months. After doing this simple exercise, you can calculate your asset allocation into two big buckets – debt and equity.For the sake of simplicity, I am not factoring in insurance, real estate or other investment avenues. You are the best judge of how much risk can you handle. The modern portfolio theory (though ancient as it came around 1952) states that the best way to allocate assets in your portfolio is largely a personal choice. There is nothing called a perfect asset allocation – do not waste time targeting the impossible. Whatever suits and works for you is perfect for you. It is a lot personal and, hence, dynamic depending on your investment horizon, age, financial situation and how your investment goals are evolving.A simple way of defining your risk profile is to answer a question honestly: What is the amount you are willing or can afford to lose without losing sleep - or in the present age without fluctuating your BP or raising your sugar levels. That is the minimum amount you could safely park in equities.Too little allocation to equities is also a risk, as it could come in the way of not reaching your financial goals. Inflations eats away your purchasing power. A popular thumb rule of equity investing is 100 minus your age as allocation to equities. These days it is changing to 110 and 120 minus your age, depending on your risk appetite.Follow some of these basics of investing. Every year, say January 1, when you think of making your New Year resolutions, look at your asset allocation and maintain the balance. If equity is higher than your comfort level, then sell and invest in debt and if debt is higher then sell debt and buy equities. If like my friend Mr B you are in a comfortable position, the best is to do nothing. And when you have done it all, don’t forget the tax characteristics of your investments. Following some of this basic investment, hygiene may not make you an investment rock star. The complexities in the financial world are difficult to comprehend even for seasoned fund managers. Yet, the fact remains that some of the most important habits of successful investors are pretty simple: Create a plan, stick to it, save enough, pay attention to asset allocation and taxes and if everything is going well just “pakad kay rakho, becho mat.” These are actually some of the key traits that lead to investing success. And yes, let the power of compounding do its wonder. 65658904

from Economic Times http://bit.ly/2INXvQp