While policy makers are grappling with management of volatility in currency and banks are struggling to manage their debt portfolio, the recent spate of high volatility in many asset classes have made even retail investors rethink on their investment strategies

Financial and physical assets have shown extremely high volatility during last six months.
What started with the unprecedented fall in the price of gold, has now got spread to assets such as debt and currency. Equity anyways has a long history of volatility and recent performance of stocks is on the dotted lines. While policy makers are grappling with management of volatility in currency and banks are struggling to manage their debt portfolio, the recent spate of high volatility in many asset classes have made even retail investors rethink on their investment strategies. While fundamental principles of investment such as investment for long term, proper asset allocation remain intact as ever before, here are some lessons that we need to learn and incorporate in our investment strategies in the process of financial planning:
 

Debt is not infallible and can be extremely risky
 

Who would have imagined that debt as an asset class would make investors holding them jittery. After the steep fall of the rupee and a series of correction measures announced by RBI, made yield from debt moved northwards, while returns moved southwards as price of debt assets started falling for investors holding debt as an asset class especially in the form of mutual funds. Many people holding debt mutual funds got a shock beyond belief as the return generated during last six months, or so, got wiped out in a week’s time. While we may convince ourselves by saying that this is short term phenomenon, the volatility of debt as an asset class has come out in open.
 

Depreciating rupee can derail your financial planning
 

Currency depreciation was always viewed as a phenomenon that had more to do with exporters and importers. But now things have changed. A depreciating currency can potentially impact your EMI also. Rupee is still showing signs of weakness and if this continues, a rate hike cannot be ruled out by RBI. Left with limited option of credit squeeze, the regulator may have to resort to repo rate hike which will impact EMIs that a large section of middle class Indians survive on.
 

Gold is not a natural hedge against inflation
 

The dream run for the gold as an asset class is over, at least for now. Most strange argument ever regarding gold’s ability to beat inflation has very few takers now. Suddenly, the craze for gold has got subdued. Gold price could have fallen further in India but gold has found a strange support from depreciating rupee. It is not that story of gold as asset class is over for ever but rationalism has replaced overwhelming emotional value that gold as an investment asset had all these years. While physical gold import has fallen due to strict measures taken by government, people have also curtailed their investments in physical gold.

Old is gold, never overlook traditional investment assets
 

These assets may not have the potential to beat inflation and they may not make you rich the way an asset class like equity can potentially do. But the fact remains that these traditional assets cannot be overlooked. PPF, NSC and some other traditional investment schemes always help in wealth creation. Every crisis in the financial market re-emphasizes the fact that an investor needs to have these assets in his portfolio in order to have appropriate asset allocation. While debt as an asset class may have caused loss to some investors, these traditional asset classes have experienced no adverse impact of recent turmoil as returns on them are fixed one year in advance.
 

Most investors tend to forget lessons taught by financial crisis and turmoil in the financial market. Some tend to over-react and disassociate themselves with an asset class if they had any bitter experience. As investors looking for wealth maximization, we need to build these experiences in the process of financial planning. Adequate risk assessment of all asset class needs to be done and we need to incorporate the maximum potential loss that we can have from investments in different assets. Crisis teaches us to be rational as an investor. Unfortunately, during the normal scenario, we tend to forget rationalism.