Stock market mantra: Wealth creation and wealth preservation equally important in sustainable financial planning

The past experiences in the markets clearly stand as testimony to the fact that no asset class is free from risk unless it’s about fixed deposits (FD). Be it the equity market, bonds, equity funds commodities, currency, or even debt funds, all suffer valuation losses whenever there are negative trends in global economies, changes in regulatory policies, or even negative arbitrary events, and hence it is difficult to be sure of the best allocation of your hard-earned money in different asset classes. Only a well-thought-after and customised sustainable financial plan can overcome such challenges.

Besides helping you reach your financial goals; value creation assists you in building a reserve fund for unexpected expenses. However, along with wealth creation, one also needs to preserve the value of their assets. Through wealth preservation, one can ensure assets’ long-term survival and maximize their capacity to produce income while safeguarding their value.

Investing in financially sound assets
While no asset or portfolio combination comes with a risk-free call, there is no denying the fact that some financial instruments are more secure as compared to others. The amount of risk varies from asset to asset. Your equity-related investments are more prone to market fluctuations when compared to G-Sec Bonds. Risk and reward go hand in hand, hence it becomes essential to plan out your asset allocation comprehensively for sustainable income generation.

Sustainable financial planning is for longer-term aims at wealth preservation. While generating value can be an active task, preserving that value is a continuous process. Long thing short, higher gains might seem attractive but the choice of asset classes should be based on your risk appetite and future goals. So before running after the news asset classes, it is important to go back to the basics of knowing the fundamentals and determine whether those asset classes are suitable for you.

Creating a personalised financial plan
The returns earned by your portfolio are determined less by the value of individual assets and more by asset allocation. Consider a market scenario wherein the equity market outperforms the debt market. Then the value of the portfolio of a person who has adopted a cautious strategy and invested more than half of his/her portfolio into debt funds, will not increase as much as those investors who have invested more in equity funds.

Not many people understand the fact that every portfolio works differently, owing to diversified financial goals, risk appetite, and expected returns. What worked for one might not work for the other. In the case taken above, there is nothing wrong with the asset allocation. If you are a passive or risk-averse investor, you might not regret the missed opportunity in investing more in equities, however, the case will be far different if you are an active investor or risk taker. A personalised financial plan is a key tool that serves as a guide to assist people in making informed financial decisions, effectively managing their assets, and gradually accumulating wealth.
For the days after
Young investors have a particular advantage when it comes to taking on higher levels of risk in their investment plan, owing to the longer time horizon for their assets to perform in the market. However, it is crucial to emphasize that one cannot just randomly dive into the pool of risk. The traditional saying “risk only what you can afford to lose” must be taken into consideration.While it is necessary to focus on your present objectives, it is also important to plan for the future, particularly when it comes to retirement needs. Seeking guidance on how to safeguard and grow the value of your assets to secure a consistent income stream in retirement is just as vital as obtaining financial advice when building your investment portfolio. One must seek to grow his or her wealth and create a sustainable flow of income for retirement. Since this is the period where one puts a halt on wealth generation and relies on the preserved wealth of his/her assets.

An all-encompassing strategy that emphasises both wealth generation and wealth preservation is key to sustainable financial planning. Always be considerate of the market and the assets you wish to invest in before taking key decisions, to establish a sustainable roadmap towards financial stability and a steady income stream.

(The author is Director, Mastertrust)

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)