When you think of yourchoices in terms of your financial goals the outcomes become a lot more productive. For example, if you want to for 8-10 years to provide for your child’s higher education, the investment product and choice will be very different than if you want to for a period of 3 years to plan for a housing loan down payment.
In the former, you have the advantage of time and can choose high return growthlike equity. In the latter, your need is for the stability of return, given that the down payment is only a few years away and mostly non-negotiable. While one goal needs the benefits of equity, the other can be addressed through debt . This becomes an automatic that is aligned well with your financial goals.
Risk, in this case, is the possibility that theclass you are invested in is out of favour when you need to exit. You can across and within an class too, there will be categories that have varying risk-return dynamics. Having a mix of more than one in your investment portfolio cushions returns. For example, in times of high uncertainty, like equity tend to correct, whereas, gold comes in demand as investors flock to safety and gold prices often rise in such periods.
Your overall portfolio value gets protection from falling too low when you have a built-in. Your strategic is most likely a result of financial goals, but you could also have a portion of your according to your risk tolerance which will also require the right .
Avoiding market timing
Timing the market means trying to buy at a price you feel is a good entry and sell when you feel markets are overvalued. This kind of tactical strategy may or may not work out as it’s hard to foretell whichclass will do well at what point in time and for how long.
Having anstrategy based on your goals and risk tolerance will get you closer to the expected return with a much greater probability than timing your market entry and exit. No one knew that rates would fall below 5% (post-tax) or that the equity market would return over 50% in 2020, yet it happened. Had you stuck you your , both these outcomes would not impact your expected return.
is an important aspect of long-term , one that can’t be overlooked if your aim is to arrive closest to your expected return.