Investing Wisely in Current Economic Conditions: Tools, Tips, Strategies and Considerations

Its difficult to make wise investment decisions when the economy enters a volatile phase. The recent economic meltdown compelled investors to take hurried investment decisions, and then economic recovery caught most by surprise and forced them to again revisit their portfolio allocation. Feared or lured, those who were caught in the volatility trap, lost track of their long term financial objectives, and that’s not wise. In this post, I will help you chalk out a fool proof investment plan that will surely help you take informed decisions in such a volatile market environment.

Firstly, its important that you revisit your financial situation before we can start strategizing. This is necessary as many of your investment goals and your risk tolerance capacity must have changed amid all these years with heightened economic uncertainty.

If your investment horizon is longer than five years, you can still look at decent returns from riskier assets. You can easily beat inflation with instruments such as stocks and bonds over the long term. Short term investors should stick to liquid cash or cash equivalents, given the market volatility is here to stay. But, if your strategy is to stash cash and stay protected in the long term, then I must warn you that your wealth will slowly erode as we cannot rule out presence of inflation in a volatile economic scenario.

Next, you will need to figure out an appropriate asset-mix of investments that balances your portfolio and reduces risk exposure to comfortable levels.

The right portfolio mix for you depends on how much volatility you can stomach without deviating from your long term goals. If we analyze the past performance of key asset classes, stocks, bonds and liquid cash, they usually balance out each other’s outperformance and underperformance. So, striking a right balance within these assets can ensure you a smoother ride by curtailing your risks and ensuring stable returns.

At last, you need to ensure that your portfolio is properly diversified among different asset classes, and for extra protection you need to further diversify within an asset class.

At this point you might say, don’t teach me that I shouldn’t put all my eggs in one basket. Well, I am just trying to tell you that even with three baskets your investments aren’t safe. So, if one basket is stocks, then you need to allocate money in stocks from different sectors and within sectors you need to pick different companies. Doing so will require a lot of time and research skills, so an easier way would be to look at diversified ETFs and Mutual Funds. Similarly, you can diversify among bond investments, and stash liquid cash investments in different bank accounts.

Tip: – Beware, if you are delaying your investment plans and relying on your job and have built a good corpus in your employer’s stock. In an uncertain economic scenario, your company could go bankrupt and you may lose your job. Even worse, your investment corpus will be wiped off in such a scenario. So, act smart and start investing wisely.

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