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The Importance of Portfolio Analysis: Aligning Investments with Your Financial Goals
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“Money isn't the end goal. Money is the by-product of living a good life.” - Satyen V. Kothari
Your risk appetite and investment strategy may change from your first job (earning less) to your latest job (earning well). It may also change when you get married, have children, etc.
Thus, investing isn't a static activity, it changes based on where you are in your life. It is important to acknowledge this fact to create a better investment strategy and build the perfect portfolio.
Your approach towards money and investments may change based on your experience. Maybe you've seen your parents winning or losing with their investments.
Perhaps you've debated a friend on the right approach to investing. In any case, it is important to learn from all the experiences that you have access to. But you must figure out your own investing path based on your goals, risk appetite, and where you are in life.
If investing is stressful, change your strategy. Better yet, work with a reliable investment advisor. If you're treating investing like a game, understand that there may be wins and losses.
To sum up, this is what your risk level will be made up of:
Risk level = Your Life Stage + Your Psychology With Money
The 9 boxes are broken down into:
You'll colour out various boxes essentially based on what matters to you. This would comprise your investment goals, risk appetite, and your psychology with money.
Actually, it's just 7 boxes that you'll have to colour out. The two extremes that you see highlighted in red don't matter because they're contradictory.
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You would invest for the short-term because you want access to money in the short-term. However, high-risk investments won't get you the desired results in the short-term.
This is because high-risk investments like stocks are suitable for a period of 5+ years. On the other hand, low-risk, long-term investments will not help you beat inflation.
At Cube, we define the short-term as 0 to 3 years; medium-term as 3 to 5 years; long-term as 5+ years.
1. Naina
Naina is in her 30s, job hopper, good income, no dependents, and some savings. She needs a safety buffer in the short-term since she changes jobs often. Furthermore, she doesn't have significant savings.
Thus, she must invest in a combination of low and medium-risk, short-term investments. But Naina doesn't have any dependents so she can also invest in high-risk, medium and long-term investments.
Investing in high-quality assets with high-quality advisory may be one of the only ways for her to break the cycle of being financially dependent on her income.
2. Sheetal
Sheetal is in her 40s, stable income, one dependent, and a relatively good amount of savings. Her profile is similar to Naina's but her coloured boxes are considerably different.
The reason behind this simple - Sheetal has a stable income and thus, she does not have to settle for the low-risk, short-term investment category.
Instead, she can invest in medium-risk investments even for the short-term. However, Sheetal's medium-term investments are medium-risk because she has a shorter time frame towards retirement.
But she has enough time to be aggressive for the long-term with high-risk investments. Here's a look at Sheetal's coloured boxes.
3. Vijay
Vijay is in his 60s, has no income, one dependent, and a relatively high amount of savings. Vijay's coloured boxes are very different because he depends on his savings for his short-term needs.
Short-term investments pay the bills so he can't be aggressive. But Vijay can invest in medium-risk assets for the medium-term because he has the ability to bear fluctuations due to the relatively high savings.
A significant number of people who have retired tend to make a costly error. They become conservative with their investments for the long-term.
This approach doesn't work because modern medicine and technology have added an average of 20 to 30 years to life post-retirement. There are other issues like inflation and life changes that may kick in as well.
Thus, it's important for Vijay to balance the medium-risk and high-risk, long-term investments in his portfolio.
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Human beings are irrational. Markets drive prices up and down. You must understand the fundamental value of an investment. This is where quality advice can guide you through what's real and what's fake.
The value of bitcoin is currently very high and maybe unaffordable for many. But that doesn't mean you settle for a cheaper alternative. It doesn't matter how cheap the coin is.
The quality of a good investment lies in the value of the investment. It is the market cap of the asset, not the popularity or appeal of the mutual fund, stock, or crypto coin.
Want to discover your path or boxes? Here's what you do:
You can reach out to your Cube Wealth Coach to fine-tune your plan further. PS. Have you become a Cube member yet? It’d be irresponsible not to. Download Now.
Note: This story is based on Cube's Founder and CEO, Satyen V. Kothari's talk about the 9 box model. Check out the full talk from Webinar 4.0 here:
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