When should you change your investment plan?


You may sometimes earn high returns by changing plans

Volatility should not be the cause to change your strategy.

There are specific volatile periods in the market which can tempt you to change your investment plan. However, every time it’s not the best idea to do so. You may sometimes earn high returns by changing plans and taking risks. But it is for sure that making rash decisions might do more harm than good.

When is it right to change your investment plan?

The best answer would be that as an investor, you should ask yourself a few questions before making significant changes to your investment portfolio. Check them below.

  1. What is the purpose of your portfolio?: It would help if you always remembered the purpose of your portfolio before making significant changes in it during times of volatility. You have invested to achieve your goals within their respective timeframe. Needless to say that markets will fluctuate, they will go up, and they will go down, but over time, and at the maturity, all plus and minus will average out to your expectations.
  2. Is there any transition in the market?: Volatility should not be the cause to change your strategy. The only reason to change the plan is that transition occurred in the market. It may be a transition from a bull to a bear market or from a bear market to a sideways market. Move slowly and know whether the phase seems exhausted or if the fundamentals have shifted.
  3. Will you miss a market rebound if you change now?: When the market is volatile, and you change your investment plan, you can miss the opportunity of bull markets and rebounds. Markets usually rebound quickly and with more strength than when they pulled back. The biggest risk an investor faces is while pulling out of the market out of fears rather than data and logic.
  4. Are you simply after the crowd?: Macro market movements are short-term, and over history, holding an investment for the long-term always outperforms. It’s good to buy stocks when the market plunge.
  5. Have your goals changed?: Once you set your goals, an investment strategy is developed that helps to achieve those goals. Investors know that investing entails volatility because if there is no risk, there is no return. And if you knew everything that is going on from the beginning, then why would you need to change strategy midstream?
  6. Are you changing plans because of fear?: If the changes you’re going to make were part of your plan when the market was stable, you might proceed. But if the amendments are in response to any fear, anxiety or other intense feelings because of volatile market conditions, please pause. Talk to your financial advisor, who can discuss with you objectively about the changes you have in mind.
  7. Is this your proactive or reactive approach?: Ask yourself whether you’re proactive or reactive in your decision to sell. Stocks drop, also spike often. If your decision to sell is an immediate reaction to a sudden drop, take a moment to do some research. Giving yourself some time to review the stock and the company’s sales history can help you make a proactive decision.
  8. What can you afford to lose?: If you fear volatility, figure out what you can afford to lose and what you cannot, and put what you can’t afford to lose in the safest thing you can find to wait out the storm. The fact is that all things have risk and “safe” maybe just less than a loss compared to where you were.
  9. How much time horizon you have?: If you have the intent for a longer time horizon, you have more time to weather volatile markets. However, if you need the monies in one year, you don’t have time to take risks. The purpose of the money in your financial plan should drive the investment change, not the actual markets that you cannot control.
  10. Did you apply the right asset-allocation strategy?: Emphasize developing the right asset-allocation strategy and then stick to it. If you do not produce the right asset-allocation strategy and play by the market movement, unless you are a serial daily trader, you are bound to lose. Also, fix the timeline for holding the investment and a limit of loss.
  11. What level of risk can you afford?: The higher-risk opportunities may look attractive, but there is a chance of losing money fast. Look into low-risk investments, like energy companies. You may make only 5%, but any ROI is better than nothing or worse, like throwing money away. Always keep your long-term goals in mind whenever you think about diversifying.
  12. Are you trying to ‘get even’?: During volatile periods, the pain of a loss becomes deeper for an investor than the joy while making a profit. They seek to break even that is to sell the fund as soon as the price gets back to where they bought it. It is a trap you must avoid because holding a stock, bond, or investment for a day has a paper loss. In doing so, you are deciding to buy it.
  13. Are you faithful to your long-term goals?: If you prioritize your long-term goals and make investments that are consistent with those goals, you should not react to market changes. Pulling money out of the market whenever it dips can be extremely detrimental to your financial health.
  14. What is the opinion of your financial advisor?: Market volatility is a learning opportunity for an investor. Share your exuberance over possible opportunities or fear over potential exposure with a trusted financial advisor. It can be empowering and educational and also make us less reactive to market changes. It’s always wise to make sense of your emotional reactions to market volatility.
  15. Should you change your investment strategy in a situation like COVID-19? What is the best advice of experts?: There’s no doubt that times are unusual now. Due to the coronavirus outbreak across the globe, the markets have reacted with more volatility than ever. While reading the headlines, maybe you feel that you should change your investing strategy.But wait! You must know that such volatility and uncertainty are inevitable characteristics of markets and are also not unprecedented historically. However, investors become scared and unfortunately, it often leads to big investing mistakes.

The best advice for worried investors is the same as always: Do nothing.

However, as you gain more experience or grow older, you might think of adopting a more conservative investment approach, pruning some of your riskier funds. That is “okay”. By then, you must have achieved most of your desired financial goals!

That’s why Comparte Investment team asks do you have “Nivesh Ki Aadat”.

With this one can say “Mutual Fund Sahi hai”,  so let me do Nivesh