Expert Talk: Diversify To Protect Your Money Against Financial Crisis
“How can I protect my money against any financial crisis?” Meenu Sharma asks. She is worried about the protection of her family investments, more so because of the pandemic. My only advice was—diversification.
What it means is to follow an exact asset allocation to diversify your investments across different asset classes basis your risk profile and financial goals. So, diversification is undoubtedly an important tool to ensure protection, but it needs to be implemented carefully.
So how do we decide when to diversify and where?
Diversification does not mean investing in every product in existence. If I, as a financial advisor, decide to diversify my business to ensure I can stay protected in this crisis, I cannot start selling mobile phones. That is gambling. Diversification means not putting all your eggs in one basket, but it also does not mean having a separate basket for each egg.
When you are investing, ensure that you do it based on your financial goals and asset allocation. That will automatically help to give a lot of clarity for diversifying your investments. It makes sense to invest in different asset classes for that. While it is difficult to provide exact investment advice without an in-depth analysis, I can give some pointers based on Sharma’s plan. She wants to retire early (in her 50s). Her real estate and PF allocation are sufficient right now. I asked her to follow these tips for managing her finances.
• After knowing her existing portfolio details, I asked her to increase her equity allocation. A distribution of around 35% in real estate, 30% in equity, 5% in stocks, 5% in Fixed Deposits, and the remaining 20% in your savings, gold, as well as insurance, would make sense.
• Do not lose the money you have already earned. Ensure you invest in the right products and not any get rich quick schemes, which are likely to be Ponzi schemes or similar scams.
• If you have ambitious financial goals (nothing wrong in having them), you need to take a more risk-oriented approach towards your investments.
• Take calculated risks, start slow, but ensure your investments match your financial goals.
• Stay patient. When you sow a seed, you cannot expect it to become a tree in a week. Similarly, when you invest in equity, which is a product designed for long-term investing, you cannot expect it to give returns in months.