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%.
- Decide the initial asset allocation. For a goal more than 10 years away, 50% of equity and 50% of fixed income is just about perfect. See: Will Benjamin Graham’s 50% Stocks 50% Bonds strategy work for India? At best, you can increase equity to 60%. Any higher than that the risk will be too high. See the asset allocation risk matrix here: I have just started investing in MFs how much loss should I be prepared to face?
- 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.