Balancing Your Investment Diet

investment-dietAs an investor, you’d have come across a lot of advice from experts on how to direct your investments. Most of these experts have one especially important suggestion; “Don’t put all your eggs in one basket”. This stresses the importance of having a diversified portfolio to maximize your profits and prevent loss.

Even if you love a particular kind of food, you can’t possibly live on that food for long; this is because your body requires you to maintain a balanced diet. Investing also requires a balance of [intlink id=”13″ type=”category”]stocks[/intlink], [intlink id=”158″ type=”category”]bonds[/intlink], liquid assets and [intlink id=”159″ type=”category”]mutual funds[/intlink]. The idea amount of investment on each of these categories depends on several factors such as your age, risk appetite and market conditions. Let’s find out how these factors affect our investment diet.

  • Age

As we grow older, we have to be more careful about what we eat and avoid food types that can harm our body. The same principle applies to investing. As we grow older, our risk appetite decreases and we have to invest in safer investments. Equity investment may bring in unbelievable returns in the short term; but these high returns are normally accompanied with high risk. Experts say, your ideal equity investment percentage should be your age subtracted by 100. So, if you’re 30 yeas old, you can invest 70% of your money in equity shares and equity based mutual funds. The rest 30% should be directed towards fixed deposits, bonds and debt funds.

  • Risk appetite

How much risk you can take depends on your family earning potential, expected future expenses and the time period for which you can stay invested. This again, depends on the life stage you’re in. If you’re in a higher age group, you may have to provide for family expenses like children’s education. Base all your investment decisions on these factors. For instance, even if you want to buy penny stocks that can sometimes give amazing rates of return, you’d have to first consider your risk appetite because these investments are riskier than the rest. If your risk appetite is low due to family commitments and you can’t afford to lose hard earned money, it’s safer for you to buy bonds like investment bonds. These offer a standard rate of return and help you save on tax.

  • Market Conditions

Finding a judicious investment mix also depends on market factors. Investors prefer not to buy stock when the market’s highly volatile. In such conditions, people who can afford long term investments will benefit more than short term investors. Interest rates and return on equity are other factors that have to be considered before deciding on your investment diet.

  • Term Of Investment

Long term investors can generally get away with any kind of investment. Even if they buy high risk shares, these are bound to improve with time and bring in some returns. On the other hand, one has to be very careful with short term investments because the shorter the time frame, the riskier the investment. This is why many experts are against day trading where the trade has to be closed by the end of the day. The shorter the time frame, the riskier the investment.

So now we have to do is to consider these factors, take a look at stock prices and stock charts and make our investments. With the right investment mix in place, you can’t possibly go wrong.

Image: Francesco Marino /