What It Takes to Build a Resilient Portfolio
The Indian stock market has been on an upward trend for nearly three years. The sharp market correction of 30% plus seen during March 2020 seems to be an event in the distinct past. However, such sharp volatility is a part and parcel of equity investing. Hence, from an investor perspective what one needs is a resilient portfolio which can weather any market disruption.
After the March 2020 correction, investors who held on to their equity allocation emerged as eventual winners. Staying invested through times of such sharp correction or market volatility requires grit and conviction; traits which can be developed only if one is clear with why one is investing for.
The first step towards building a robust portfolio (one that will shield you during uncertain times) is to buy into different asset classes. Diversify your portfolio across asset classes such as equities, fixed income, commodities, real estate investment trusts (REITs), infrastructure investment trusts (InvITs) to name a few. Such an approach will help mitigate risks associated with market volatility and economic uncertainties, ensuring that no single asset class dominates the portfolio's performance to the extent that the portfolio can topple when the going gets tough.
Second, one must embrace strategies like asset allocation and dynamic rebalancing to make portfolio resilient. This can be done in an automatic manner by opting for mutual fund offerings wherein the exposure to various asset classes is dynamically managed basis the changing market conditions. For example, in a category such as the balanced advantage, the scheme allocates higher in equity when the equity market valuation is low and lower when the equity market valuation is high.
Third, one needs to adopt a disciplined investment strategy grounded in prudent risk management. Risk can be managed by setting predefined asset allocation proportion and by rebalancing the portfolio annually with an aim to maintain alignment with one’s long-term investment objectives. Apart from this, one should also maintain an emergency cash reserve as a cushion against any unexpected expenses or market downturns. Over long term, adhering to these simple steps can go a long way in generating better risk-adjusted returns.
Fourth, keeping an eye on macroeconomic trends, geopolitical conditions, and regulatory changes is important when it comes to making an informed decision. It is only by staying informed and flexible, investors can adjust their portfolio allocations to capitalise on emerging opportunities and mitigate risks in potential areas which are could face a downturn. One needs to develop a long-term perspective and avoid reactionary behaviour like panic selling during market fluctuations or uncertain times, in order to build resilience into one’s investments.
Finally, a continuous learning mindset is the foundation for building a resilient approach that helps one construct portfolios capable of weathering uncertainties. Therefore, always be ready to learn and never rest on your laurels.
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