What is the best investment in current market conditions? Should I buy gold? Should I exit SIPs and invest in International stocks or buy Index funds/ETFs? Should I play it safe and invest into capital guaranteed insurance plans? These are regularly asked questions in my sessions.
First, there is no such thing as the best investment in the current market. The best investment is actually an instrument that is aligned to your financial goal and investment timeframe.
By searching for the best investment in an ad-hoc manner, investors are making the following mistakes :
1. Using their emotions to guide their financial choices rather than choosing the right fit for a goal. For example, by investing in capital guaranteed products, investors may be satisfying their loss aversion bias, but these low returning products would certainly not help in meeting financial goals as they don’t beat inflation.
2. Let recency bias, which is basing investments on recent events, affect their portfolio. Investors who are piling up on gold based on its stellar performance this calendar year, run the risk of investing at a high.
3. Have a portfolio which is not diversified. Investors diverting mutual fund SIPs to stocks will not only have a tax and cost impact but may have a concentrated portfolio leading to higher risk in the portfolio.
Long term investing is a process. People want that magic pill which will give them a product that gives the best return with the lowest risk but that doesn’t exist. And that is why goal-based investing is harped upon all the time. Often, I find that people are not willing to listen to any process, which involves patience and may not have excitement or something to boast about, but it is the process of choosing investments based on goal planning, which will get you into the “best investment”.
The best investment is about risk management and a strategy.
The strategy is a financial plan. You can’t hope to have financial success if you do not have a plan to achieve it. For this, work with a financial planner rather than just following a blog or listening to market gurus in media. Sticking to the financial plan is a challenge. Individuals get financial plans written but are not able to follow through. This is because of being diverted by current markets/ short term requirements. Like in all areas of life, financial success is dependent on your planning and actions.
Risk management is about managing the risk of volatility and loss. You cannot control market movements, but you can control your portfolio volatility by asset allocation and diversification. For any investment product, understand the risks involved and how it would affect your capital and then diversify among asset classes that do not have the same risk. This means having a combination of stocks, bonds, gold, real estate, etc. Each asset class has different risks. Within the asset class, diversify. If you are investing in equities, diversify among large caps and midcaps. Don’t stick to one type of investment only.
Building wealth is a marathon, not a sprint. Stop looking for the best investment in the current market and focus on investments that can last you through all phases of the markets.