Risks and uncertainties of your Investment portfolio (A guide)

Life is an unknown and often adventurous journey. There is always an element of surprise in the next second, while we are busy living our lives. Risk is something that is always present inherently given the uncertainty of events in life.

If we have the ability to predict (or) know the future, then maybe, that would be a smooth ride. But that is in a utopian world where everything is perfectly alright. These things equally are true within the realm of Finance.

How I managed to build a portfolio while facing intermittent risks along the way?

It’s been three years since I have started taking Personal Finance and investment matters seriously.

I have read good number of books on investment strategies, savings, and other personal finance related topics. But, in due course of time, it is through direct application and appreciation of various learnings that made it possible for me to know what works and what doesn’t.

Below are some of the decisions that helped diversify my investments and build the foundations for assets in the process of wealth creation and Financial Independence.

Real Estate

I was living in a relatively smaller house with a congested living area earlier and the need for a bit moderate living space with separate work space has pushed me towards thought about opting for a rented house.

I started preparing budget outgo of rent from my income. But after considering various aspects, I bought a house with a significant credit from bank, as leverage.

Though an urban setup it is into, it is still can be called a suburb and that enabled me to buy the house relatively at a better price bargain compared to the prime area of the city where I work.

Although it added significant debt to my portfolio and when I look back now it is worth considering the rise in housing prices in the mentioned area. Also, I was able to claim the tax exemption for my house EMI payments.

On top of it, I have given one of the storeys for rent which I gift to my parents for their living expenses. So my earnings that go to my parents from my pocket were reduced with this.

So I felt that my decision to invest in real estate gave me better returns compared to the other investment avenues.

Learning: No one can be 100% sure of the economic scenario given the huge number of parameters and the cumulative impact deciding the returns for our investment. Taking calculated risk is necessary for building assets. And in the current context, the joy of sharing my income with my parents is a bonus.

Stock Market

I have started value investing with small-caps and mid-caps initially, but over a period, have made a minimal return but significant losses with both of them. But when the Corona pandemic struck all of us during the 2020 first quarter, I had to rethink my investing strategy.

Again I took a calculated risk, booked small losses in my current equity stocks, shifted from small and midcaps to large-cap stocks as there are quality stocks that are available at a cheaper price. This overturned, improved my stock portfolio quality turning from losses towards around 20% average return in a span of 4 months i.e., of course, un-booked profits I must admit.

If I had to buy those stocks before the pandemic, maybe I would have had to buy them at a premium price. But the pandemic enabled me to shift to quality stocks which enabled me sleep peacefully.

Learning: Beware of the happenings around and use the opportunities to turn risks into rewards.

Credit Card

I am not a great fan of credit and was never interested in credit cards. But after a deep thought and dilly-dallying for over years, have applied for a credit card from a reputed bank for the first time and using it since a year for all my utility payments, grocery orders, shopping and other credit needs.

It has given me good returns in terms of cashback, coupons which I’ve used for subsequent small utility payments like mobile recharges, bills, food orders, etc. This is not to advocate credit card usage to leverage unmanageable amounts. But limited usage with one or at the maximum two cards which can enable streamline our payments for some benefits.

This I call it the Wealth-sheds(for more info, refer to my previous blog post How to become Rich?). A watershed collects streams of water to build a big pool of water body and acts as emergency storage. Similarly, the Wealth-shed collects small amounts of money to build a big fund.

I have directed the maximum of all my bill payments and money transactions via credit card that ensures I collect good enough points that I can use for further bill payments etc. And the saved amount directly goes to my other investment avenues how little the savings might be.

Learning: Think, at times, beyond our pre-conceived notions on some of the matters of importance. Who knows, we might get a gem of an idea which was lost earlier in our clouded judgement.

Insurance

It’s been two months, my father accidentally slipped and fell down on the floor in my house and had to undergo knee surgery. The Health Insurance that I have opted for my parents, a couple of years back, when I started reading about Finance subject, has come to our rescue. I have used a cashless claim.

This saved me a good amount of money after the unfortunate accident. Health Insurance and Term Insurance are by definition pooling the risk, which acts as a cushion to protect our savings during the time of unfortunate events.

Learning: Prepare for war when there is peace.

Peace and Patience

It is the peace of mind that enables us to focus on what really matters. We take better decisions when we are at peace with ourselves. As I Practice Yoga and Meditation, though not in perfection, has enabled making my decision-making process better.

It helps in sustaining our rational thought process even during times of volatility, be it in the economy or the world at large (pandemic) or within our family or near and dear.

So maintain calm and composure. It definitely can be a great addition to our abilities that improve our Emotional Intelligence (or) Emotional Quotient, in-turn providing better returns, which reflect in we leading a better quality of life.

Learning: Irrespective of what happens outside, Be aware that, Peace and Happiness are within.

Conclusion

Just reading the technical aspects of finance or observing other’s decisions doesn’t help. The key is, we must apply our learnings.  Neither just practice by random decisions without knowledge helps. Learning and practice must go hand in hand to test the waters and know about what works and what doesn’t, given the uncertainties of life in general.

We must constantly learn and apply our learnings so that it helps to know what works in real-time, with all the elements of surprise that we encounter in our day to day lives.

These are some of the important learnings that helped me build a strong foundation for my journey towards Financial Independence. Hope it helps you too.

Keep Learning and Happy Investing..!