How to make lumpsum investing less fearful?

Let’s say you've just received your ESOPs or a large bonus. You don’t want to spend it right away. Instead, you want to save and invest it wisely, to build your wealth.

A common query we often receive from our clients regarding this is: Should I invest the lump sum all at once, or should I split it up into tranches?

Understanding the Concern

The straightforward answer to this is: If your investment is expected to yield positive returns, it's always better to invest it lump sum.

However, the reality is often more complex—there's always a risk of the market declining, sometimes more than it rises. That's where it's important to understand the underlying concern of where this question is coming from:

From an inherent fear of: What if I lose my hard-earned money?

And you have every right to anticipate such a possibility, given the effort you've put into earning it. And this is precisely where a good risk mitigation strategy helps.

Role of an active Risk Management Strategy

As previously mentioned, STP remains a standard risk management practice we adhere to in wealth management to mitigate potential market downturns.

However, it's just one aspect of our investment approach. The underlying principles we focus on for addressing such possibilities include:

1. Investing in a diversified portfolio: composed of assets with positive expected returns, which ultimately work in correlation with each other to give great consistent returns.

2. Long-term perspective: Acknowledging that in the short term, the portfolio's value may fluctuate. However, to realize the positive expected return, maintaining a long-term perspective is essential.

Think of your diversified portfolio as a 'volatile savings account' that generates a favorable compounded return. While this account may experience occasional volatility, adopting a long-term viewpoint helps offset these fluctuations.

For example, let’s say you happened to invest one year before the great financial crisis:

The equity market saw the S&P 500 (US) fall by 37.00%. However, the bond market, represented by the FTSE World Government Bond Index, rose by 10.90%.

If you're in your 40s with a 70/30 equity-bond diversification, your portfolio experienced a relatively lower downturn compared to what it would have with a pure equity portfolio. 

The point being: diversification helps in achieving consistent returns on your portfolio, cushioning it from volatile markets. Additionally, having a long-term perspective helps mitigate these fluctuations.

How do we ensure risk mitigation?

This is also where moving your portfolio in tranches in STPs serves as a super risk management strategy.

• STP enables you to invest a fixed amount regularly over time, regardless of market conditions. By doing so, you purchase more units when prices are low and fewer units when prices are high, thus averaging out your cost per unit over time.

• This systematic approach helps mitigate the risk of investing a large sum at an unfavorable time, reducing immediate exposure to market volatility commonly associated with lump-sum investments.

Additionally, leveraging the appreciation in debt products further aids in navigating through volatility. By diversifying your investments across different asset classes, you ensure your portfolio stays relatively afloat, even during turbulent market conditions, rather than experiencing a complete decline.

Hence, our primary focus lies in ensuring the consistency of your portfolio returns. Because, in the end, good investing is all about knowing that your wealth, your money, is in good hands and growing steadily, without worrying about potential losses. That's why we prioritize strategies that not only aim for growth but also aim to safeguard your assets against unnecessary risks. And that remains one of the prime values that we hold here.

Know more on the rich rewards of investing in Quality & Conviction