Seeking Guidance from a Financial Expert

In our previous editions of Weekend Bytes, we have discussed various tenets that an investor could adopt to reduce risks while investing in equities, namely, tenet 1: Diversification, tenet 2: Thinking Long Term, tenet 3: Mutual Funds over Direct Stocks, tenet 4: Managing Emotions with SIPs and tenet 5: Reducing Volatility with Hybrids. But were these all? No, there is a last one!

As popularly stated “Risk comes from not knowing what you are doing!”

With that thought in mind, let’s discuss tenet 6 for reducing risk while investing in equities – Seeking Guidance from a Financial Expert.

Why is there a need for a Financial Expert when investing in Equity Markets?

Keeping Investors focused for the Long Term

As we have learnt from the previous tenets in this series, in the short run, various news and events, domestic and global, drive the equity markets. Such scenarios dissuade investors from holding onto their investments for a longer investment horizon. Thus, in order to guide investors through the ups and downs in their journey of investments, a financial expert can play a crucial role.

Risk Appetite versus Risk Tolerance

While both terminologies tend to be used interchangeably, both are actually different. Risk appetite is the amount of risk that investors are willing to take in order to achieve their investment objectives. Risk tolerance refers to the amount of loss an investor is prepared to handle while making an investment decision. More often than not, investors misjudge their risk appetite, leading them to make inappropriate investment decisions. Against this backdrop, consulting a financial expert could be wise move, as they can help investors assess their risk tolerance. This would accordingly help them in making realistic investment decisions.

Helping Investors define their Goals

It has often been stated, “An investor without an investment objective is like a traveler without a destination!”

Since financial experts take various factors into account when conducting an in-depth assessment of an investor's financial situation, they can help investors set specific investment goals. For example, an investor may want to save for retirement, or pay for their children's education, or accumulate wealth over a specific time horizon.

In that light, they can help investors prioritize their goals, and establish an investment plan to achieve them.

Risk Management by creating a Diversified Portfolio for Investors

Diversification is a key approach used to reduce the overall risk of an investor’s portfolio. This is done by allocating within each asset class and / or across multiple asset classes. While the concept sounds easy, assessing the quantum of allocation and rebalancing the portfolio can be a tedious process for a lay investor.

Against this backdrop, financial experts can help investors create a portfolio that aligns with their investment goals and risk tolerance. As a result, this would aid in the creation of a balanced portfolio that is designed to achieve long-term growth.

Keeping Investors Informed

With the continuous advent of new products, regulations, macroeconomic and market trends, keeping up with these developments can be challenging, especially for those investors who are not well-versed.

Keeping this in mind, a financial expert can keep you informed about all these developments, help you understand the impact on your investment strategy, and accordingly, help you make more informed investment decisions.

Conclusion

Over the course of this 6-edition series, we have tried to cognize our readers / investors about the key tenets, that should be kept in mind in order to reduce risk, while investing in equities.

As we have discussed about the risks involved in the short term, adopting all these tenets could go a long way in having a relatively smooth investment journey. This could let investors remain focussed for the long term, and help their portfolios realize true compounding potential.

Re-capping the 6 tenets (You could click each of the tenets listed below in order for further details):