We all worry about whether our investments will generate returns to accumulate enough wealth for our future needs. But being too anxious can be costly!

It can also lower your portfolio’s return. Here’s what you can do to reduce your investment-related anxiety.

Anxiety Zone We define the last five years, when you approach a life goal, as the anxiety zone. Say you need ₹75 lakh to fund your child’s college education. Any shortfall in the last five years of your investment horizon due to poor investment performance or lower savings rate can affect the chances of achieving your life goal.

At that point, you cannot invest in equity to bridge the gap; if your equity investment declines, you will have less time to recover losses. Because you cannot invest in equity, you have to increase your capital contribution.

Unless you increase your income levels, increasing contribution requires lifestyle changes, which may mean reducing your living expenses.

The stress you face in the anxiety zone can impact you in two ways. One, your asset purchases may be driven by emotions because your logical mind is unlikely to function effectively when you are stressed. Two, driven by your emotions, you may hold on to your loss-making investments and sell your profitable investments too soon.

In both cases, your returns could be lower than required. So, how do you manage when you are in the anxiety zone?

Reducing anxiety First, calculate the minimum amount you will require in the investment account to meet a scaled-down version of the life goal you are pursuing.

So, instead of sending your child abroad for higher studies, how much would it cost if you send her to a top school in the country? Suppose instead of ₹75 lakh abroad, it costs ₹30 lakh to educate her within the country. You should invest in five-year bank fixed deposits as you enter the anxiety zone so that the maturity value of the deposits at least equals ₹30 lakh.

Second, suppose you want only a small proportion of your portfolio in equity (say, 10 per cent) and the rest in bank deposits during the anxiety zone. You should be willing to contribute additional capital to the earmarked investment account.

This capital can be additional savings from current income or investments transferred from another account earmarked for a lower-priority goal.

Third, if you are entering the anxiety zone relating to your retirement date, consider converting a sizable proportion of your investment into automatic income streams. So, transfer money from your retirement account to monthly income bank fixed deposits. The amount you transfer to such deposits should fetch you monthly interest income to fund your post-retirement living expenses. Investing in bank deposits reduces your stress inside the anxiety zone. But it also exposes you to inflation risk - the risk that a spike in price levels prevents you from accumulating wealth to achieve your life goal.

That is why your investments in bank deposits should primarily cover the amount needed to achieve a scaled-down version of your life goal; some capital should be invested in equity too to provide higher returns.

The writer is the founder of Navera Consulting. Send your queries to >portfolioideas@thehindu.co.in

Related Topics
comment COMMENT NOW