Investment Impact: Geopolitical Crises

Turn on the TV or pick up a newspaper and the whole world seems to be in a chaos. Sample these headlines from a few recent publications...
• Ebola outbreak widens with toll over 1400
• Ceasefire in place, but difficult talks lie ahead for Israel, Hamas
• No major breakthrough in Ukraine-Russia talks
• Iraq calls for international war against ISIS
It's as though things couldn't get any worse.While we all hope and pray that the global scenario clears up, as investors do we need to react to these disturbing events? Are these likely to affect our economy and our finances in any way?

Economies of the countries concerned would be affected by these events and since the world is now a global village someone might wonder if they can affect our economy too. Per se our markets are not expected to be significantly affected negatively by these global events; in fact as Russia and the African countries fall out of favour with global investors, some of that money might find its way to the other emerging markets. However investors need to be cautious for an altogether different reason… in fact the opposite one. At the moment the stock markets look rather overpriced.

In such scenarios it is good to be sure we have a solid footing so that our investments are not shaken. One of America’s greatest presidents once said, “Be sure you put your feet in the right place, and then stand firm.” That is great advice to follow for one’s investments and especially talking about long term investments.

Put investments in the right place...

To put one’s investments in the right place there are 2 dimensions one needs to consider. The first and more important one of these is asset allocation.

i. About asset allocation quite a lot has been discussed through past Quantum Direct articles; you can click here to read the latest one. It is all about distributing your investments among several asset types.

Perhaps you are the type of investor that is all for equities. But is it advisable to concentrate all your investments in equity mutual funds or shares at any given time? Any sound advisor would tell you otherwise. You could be a conservative investor who believes only in bank deposits, PPF and such debt income products. Is it fine to shun growth investment products altogether? Analysis from historical trends of how various asset classes viz equity, gold, real estate and FDs have performed in relation to inflation in the past suggests that at any time it is important to diversify one’s investments in more than one asset type appropriately.

Now the keyword is “appropriately”. What is appropriate for one person may not be for another. Basically the appropriate asset allocation for anyone would depend on –
Age: As with many other things we do, age has a say in where we should be investing in ideally, and in what proportion.
Risk tolerance: How much risk (in terms of possible loss of investment) can you deal with based on your financial background. Often other parameters like psychological traits also affect this.
Time horizon: Whether it is best to invest in equities, debt, gold, real estate etc depends to a large extent on the duration for which we can stay invested.
To get a broad idea of the ideal asset allocation for you might be, you could check the asset allocation table.

Experts believe asset allocation plays a greater role in determining what returns an individual may earn from investments than the role played by selection of individual securities from the asset types; which is the second aspect to consider.

ii. While selecting individual securities, particularly while choosing mutual fund schemes, it is important to be sure that the scheme matches with one’s own investment goals. The most obvious parameter everyone would look at is past performance. However past performance must be considered over the right time frames.

Mature investors might feel the need to go beyond performance; they might prefer schemes that not only emerge from their filter for consistency in performance but are also a good match for their preference of investment outlook and style.

...and then stand firm

When you have made the selections right it is important to stick with the plan. Most importantly in long term investments. At times interim performances may drive you to re-check whether you made your selections right but as long as you are convinced of it you should be okay.

So go on, keep building and managing your portfolio on these 2 principles, and it should be able to withstand any chaos unharmed.. Before making any investment decisions please consult your financial advisor.

Above article is authored by Quantum.

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