In this article, we discuss two different questions on asset allocation. Reader (1) says, “I am 25 years old and in a well-paying IT job. After all my expenses, including supporting my family, I can comfortably invest around 100% of my monthly expenses. I am investing it purely in equity to catch up with my EPF account balance, which has built up over the last three years”.
“My question is, should I maintain 50-50 equity to debt once I catch up? Or can I be a bit more aggressive in my early stages of investment? Let’s say about 70-30. Maybe once I turn 30-35, I can slowly start balancing close to 50-50. Is it okay to do this? Or will putting so much equity bite me eventually?”
Investing 100% of monthly expenses is fantastic. It may be hard to keep this up once you get married and have children, but your retirement planning is secure if you can. You should ask yourself, “Why do you want to be more ‘aggressive’?”
Is it not because you believe more equity exposure equals more returns? What if the following 5-10-year returns are poor or lower than your expectations? A higher return expectation (from the overall portfolio due to higher equity) implies you invest a lower amount. If the returns do not pan out how you want, you cannot go back in time and invest time. This is why a good chunk of fixed income is always needed in the portfolio for stability.
This is why a balanced asset allocation is crucial. This is why the freefincal robo advisor tool recommends no more than 60% equity as the initial exposure with a step-wise reduction in future to combat the sequence of returns risk.
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Reader (2) says, “Me and my wife were forced to take a non-refundable advance of 10 lakhs from our provident fund (though it is a part of our retirement corpus) to meet a portion of expenditure towards buying land for house construction. Should I increase my PF contribution, or can I use an arbitrage fund or a value fund
to make up for the dent in our PF balance?” Reader (2) has 14 years to retire, and the current asset allocation is 55 equity and 45% debt.
Yes, you certainly have to invest more to make for the dent in the corpus. This asset allocation is just about right for now. In the future, the equity allocation has to be reduced. So, you can continue to invest more in the same asset allocation for the next 5-6 years and then decrease it linearly over the remaining period. Depending on the corpus, the equity allocation at retirement can be 20-30%.