Since Sep 2024, my retirement portfolio has lost an amount equivalent to 1 to 1.5 years of my annual expenses (X). That is if it was 10 times X in Sep 2024*. It is now 8.5 to 9 times annual expenses. * Not my real portfolio value. It will take a huge fall to erase my FI status, but it is important to answer some questions.
Is this big or small? To me, the more meaningful question is, what if the fall was much more and the recovery took a few years?
Can I emotionally handle it? I don’t know. The last time that happened, my net worth was near zero. How I will react this time is not known. If anyone assumes they know …., the less said, the better. Also see: 16 years of mutual fund investing: My Journey and lessons learned.
Can I handle it from a logical standpoint? Yes. Since, hopefully, retirement is 15 years away, I can weather a big storm that begins today. What if that happens 5Y from now, 7Y, 10Y? In short, do you respect your money enough to have a risk management plan? Or is it all hope?
Instead of worrying about wasteful Q’s like, “Is this a good time to invest?”, “Should I stop my SIP?”, “When will the market recover, or when is the bottom?”. It is more productive to ask personalised goal-based questions.
How to create a market-independent investment strategy
The steps to do this are listed below.
Be clear about when you need the money. This may seem trivial, but it is the most crucial step in the investment process. It decides how much risk we can take and, therefore, the asset allocation.
Have reasonable return expectations. For example for long term goals, one should not expect more than 9-10% from equity after tax. Even today, getting 7% after-tax from fixed-income instruments is difficult. So after several years, this will be no more than 5-6%.
At this stage, one usually starts systematic investing. However, there is a catch – the key step is missing. Market returns are unknown and uncertain. To ensure we achieve our target corpus no matter how equity markets behave, we need a variable asset allocation plan. That is, how are we going to reduce the equity exposure so that the actual corpus does not deviate too much from the target corpus? The target corpus and the amount to be invested must be calculated by using this asset allocation plan. This is automatically accomplished with our robo advisory tool.
Now systematic investing can start. The other side of the coin – systematic risk management is already planned out in the above step. We only need to review the portfolio once a year, check our actual asset allocation, and rebalance it if necessary to bring it in line with the expected values as per the variable asset allocation plan. The use of simple products like index funds will make the portfolio review even simpler.
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Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over 13 years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), LinkedIn, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free, AUM-independent investment advice.Our flagship course!Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions!⇐More than 3,500 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.Increase your income by getting people to pay for your skills!⇐More than 800 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner seeking more clients through online visibility, or a salaried individual looking for a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you. (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos! Our book for kids: “Chinchu Gets a Superpower!” is now available!Both the boy and girl-version covers of "Chinchu Gets a superpower". Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. The narrative revolves around what he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management. What readers say!Feedback from a young reader after reading Chinchu gets a Superpower!
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