Investors generally feel investments are risky thereby invest most of their savings in financial instruments that earn low income, without paying attention to the inflation aspect. Inflation would erode the value of one’s investment at every passing day.
As we know, historically investment in equities has proved to provide inflation-beating superior return over a longer period of time. However an investor having large exposure to equities can protect his equities investments through exposure to related derivative instruments.
For instance, if a stock that the investor holds is already in profit and if the investor feels that the stock price might fall in the near future temporarily, he can protect his profit by selling a future in the derivatives market.
Another excellent way to protect one’s financial assets is through asset allocation. An investor can have exposure to various financial assets such as equities, bonds, money market instruments, real estate, commodities etc. Asset allocation would help in determining the percentage of an investor’s investments to be held in various asset classes. It has been observed that over 94 percent of returns on a managed portfolio would come from the right level of asset allocation between stocks and bonds.
Benjamin Graham advocated the common-sense approach to investment viz.: 50/50 split between equities and bonds. When the value of equities goes up, an investor can restore his portfolio’s balance by liquidating a part of his equity portfolio and vice versa.
The primary benefit from his strategy is that the investor is not drawn into investing more and more into equities in a rising market, thereby protecting his investments in various financial assets.
Benjamin Graham’s 50/50 asset allocation has been further enhanced by Bogle who advocated strategic asset allocation. This would involve adjusting the percentage for each group of investors after considering investor’s age, financial circumstances and objectives. For this purpose, he classified investors in terms of their lifecycle phases. For instance, during accumulation phase the investor would have larger exposure to equities while during distribution phase, he would have lesser exposure.
These asset allocation strategies have historically proved to have helped an investor to protect his financial assets.
An investor should protect his financial assets not only during his life time but also after his death.
For this purpose, he can follow suitable estate planning strategies. Estate planning helps an investor to protect, preserve and provide for his total assets for the benefit of his family and others. For instance, by creating a suitable trust, the investor’s wealth can be protected from creditors, as such trust assets would not form part of investor’s estate.
By adopting the above simple techniques, an investor can protect his financial assets from the vagaries of market dynamics. Besides the technique would also help him to pass on his hard-earned financial assets to his legal heirs seamlessly.
Allan has been blogging about personal finance and investment for the last 4 years. Allan holds a BA in Business Administration and has a great knowledge of savings accounts. When he is not blogging, Allan enjoys spending time with his family and friends.