Explained: How should investors approach the market correction?

When it comes to investing to attain financial goals, a one-size-fits-all rule does not work. Asset allocation changes as per the life stages of the investor. Hence, it is different for a young investor, a middle aged professional and an older investor.

Apart from this, investments also depend on the person’s risk capacity and risk attitude. A young investor in his 20s may have a higher risk tolerance than an older investor. As such, the younger investor can put in a significant portion of the portfolio towards equity investments than his older counterpart.

Some experts say the thumb rule for investing is to subtract the investor’s age from 100 to determine allocation towards equity investments. For instance, if the investor is 24 years old, he or she may allocate 76 percent of the portfolio in equity investments.

Here’s a look at what a young investors, middle-age professionals and older investors could do to reap the maximum benefits of the market correction.

Equity: 80 percent

Real estate 0

Cash 5 percent

Debt 15 percent

Equity: 70 percent

Real estate 0

Cash 5 percent

Debt 25 percent

It is imperative to make smart money decisions in 20s and 30s to lead a financially sound and secured life. Before starting their journey of investment, young investors should keep in mind that diversification reduces investment risks.

“Investors, especially young professionals, are information savvy in this technology-driven age. Some of the popular topics that they pay attention to include risk profile, financial goals, short term and long-term investment options,” Financial Express quoted Nikhil Aggarwal, founder & CEO at Grip, as saying.

At present, apart from stocks and mutual funds, young investors are also opting to invest in volatile instruments such as cryptocurrency. To manage volatility, an individual can invest in non-market linked returns such as fixed deposits.

Equity: 60 percent

Real estate 10 percent

Cash 5 percent

Debt 25 percent

Equity: 50 percent

Real estate 18 percent

Cash 2 percent

Debt 30 percent

The reason why most financial advisers believe in age-based asset allocation is to ensure that exposure to investment risk is reduced with age. The older one grows, asset allocation shifts from equity funds to debt funds and fixed-income investments.

Experts say what is heartening to see is that the investors stopping their regular investments such as systematic investment plans in mutual funds in a bearish market. Market corrections are a test of patience and resilience of investors, who have invested in stocks and mutual funds (MF). Such market cycles with come and go in an investor’s journey several times, Business Standard quoted Sorbh Gupta, fund manager – equity, at Quantum AMC, as saying.

“Investors should stick to their asset allocation plans and use a staggered approach to increase allocation to equities,” Gupta said.

Equity: 40 percent

Real estate 18 percent

Cash 2 percent

Debt 40 percent

A sudden slide in the stock market has resulted in a wake-up call for older investors who now believe they should not have invested so much into stocks.

While approaching retirement, an investor’s portfolio should be a more balanced stock-and-debt asset mix than a stock-heavy portfolio. This would reduce the effect of a bear market.

“Some feel almost ho-hum about stock-market volatility. But they’re getting older and they have less time to make up for losses,” The Wall Street Journal quoted Paul Auslander, an adviser in Clearwater, as saying.