Never lose money on your investments: first step towards wealth creation

livemint.com:

Equity is one of the best performing asset class but its penetration has been low in India, accounting for only 4.8% of total household savings. Furthermore, whenever the penetration has increased significantly, it is mostly during high valuation periods. The primary cause of such low penetration may be volatility and concerns over the safety of capital.

If we consider a typical investor portfolio, there are three risk buckets that an investor consciously or subconsciously manages: personal risk bucket, market risk bucket and aspirational risk bucket. Now, without enhancing the performance of the personal risk bucket, it is nearly impossible to increase the performance of an investor’s overall portfolio, as it is one of the biggest and core part of the investor’s portfolio. Equity is one of the asset classes that can be considered for this purpose. However, the challenge with equity is that it also adds significant risk to the overall portfolio.

Investing can be likened to driving a car, where acceleration is similar to investing in equities. However, one cannot keep accelerating continuously as there are dangerous curves and traffic on the road. That’s why cars have brakes to calibrate speed as needed. In this analogy, brakes can be compared to fixed income investments. Nonetheless, there is still a risk that someone else may collide with your car. To handle such situations, we need to have airbags in the car. At the portfolio level, allocation to gold is required to withstand such crises. In this context, equity acts as acceleration, fixed income as the brakes, and gold is the airbag.

During volatile periods, fixed income investments act as volatility controllers, while during any critical situation like the subprime