Many readers ask us from time to time how to increase their equity exposure for long term financial goals. Their current portfolios are debt-heavy and largely ill-liquid.
This is a serious problem many investors face, particularly those who started earning early in their 20s. In my case, I started earning and investing for retirement only in my early 30s. Like many others, I, too, had a debt-heavy portfolio for several years (close to a decade).
Only after 13-14 years, I hit the 60% equity and 40% fixed income mark. So, for someone who started earning in the early 20s with regular contributions to EPF and no contribution to equity, it would take a lifetime to correct the asset allocation.
One cannot wait that long to reach 50% to 60% equity because the portfolio de-risking would need to start in the last decade before retirement. More importantly, a person so used to seeing nice fixed-income returns would not be able to handle the volatility of equity.
It is easy to say “invest aggressively”. During a bull run, it would seem like an excellent idea. However, a crash (and it will) and, worse, a sideways market will come because of political or economic instability for 5-6 years.
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So what can be done?
- Be realistic. Lower your equity allocation target to 35% or 40% initially,
- Do a proper goal-planning exercise. Determine the retirement corpus required.
- The freefincal robo advisory tool comes with a custom asset allocation schedule. This means you can now factor in your desired asset allocation and how you wish to change it over the years.
- You can use our goal-based Portfolio Review/Audit Tool to adjust your asset allocation and investment amount required to determine how close you reach your retirement corpus.
- Keep in mind that at the time of retirement, your equity corpus should not be more than 30% to 35%.
- Doubling equity exposure should take at least 2-3 years, depending on the amount you can invest and your risk awareness (not risk appetite!). Tripling equity exposure should take about 4-5 years in total. Market conditions will also play a big role.
- Assuming it would take five years to go from 10% to 30% equity, how much more time do you have to keep increasing equity to 40% or even 50%? Again, remember that it is inadvisable to keep increasing equity allocation in the last decade before retirement. So any increase is best done before that.
- You can use the portfolio audit tool mentioned above to adjust the asset allocation in future years with reasonable return expectations.
- Finally, remember that a high investment amount may be necessary to account for the lower equity exposure. If you cannot afford to invest that much, you will have to change the assumptions made in the retirement plan – lower expenses, inflation estimates, and postpone retirement. This would imply expecting a lower standard of lifestyle in retirement.
- No matter what you choose, never upgrade your lifestyle unnecessarily in future.
Where to invest in equity? Avoid mid cap and small cap funds. While a Sensex or Nifty index fund would be ideal, those desirous of lower return volatility can consider a multi-asset mutual fund. For recommendations, see Plumbline: Handpicked mutual funds.