How much equity should I hold in my portfolio?

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A few days ago, I gave a talk at a CFA Society meeting. One of the modules is covered in this post: How much equity should I hold in my portfolio? We know that equity has the potential offer better returns than fixed income (emphasis on potential) but how much equity – either as direct equity or as mutual funds or as both should I hold in my portfolio? Let us find out how volatile different equity exposures have fared over the last 20+ years.

I would bet that most people who claim that they have a high-risk appetite do not know what exactly that means. For if they do, they will never claim so. Also claims like, “I am young, so I will have 80-90% equity in my portfolio or 100-age exposure” do not highlight just how risky holding so much equity can be.

This post is part of Resolve is a series of steps on investing and portfolio management.

Step1: How to quickly select equity mutual funds and build a diversified portfolio

Step 2: How to Quickly Decide: Should I stay invested or exit my mutual fund?

Step 3:  Do we need to time the market?

Step 4: Why we need to gradually pull out of equity investments well before we need the money!

How much equity should I hold in my portfolio?

The reasoning used in this video and in step4 mentioned above, form the main framework of the Freefincal Robo Advisory Software Template. Here are some slides from the above talk.

These are the two funds used in the study.

Read more:

Are we now in a bear market? If a Bull Market can be this bad!

Sensex Charts 35 year returns analysis  stock market returns vs risk distribution

 

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About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of freefincal.com.  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Pattu” as he is popularly known, has co-authored two print-books, You can be rich too with goal based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management.  He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
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5 Comments

  1. Arrived at the same allocation but through different parameters, nice video Professor.
    But I don’t think many will stop at that allocation, particularly the ones in their 20s.

      1. As of now, I do not have any specific parameters that I practice Professor, but there are some in your video that I could understand and implement.

        Although realistic, the 10% return that you always advocate seem pretty conservative to most of the investors. Also, with a mix of mid cap or even a little bit of small cap funds, wouldn’t it be likely that one could get 12%-15% over the course of 20 years, I do acknowledge the sequence of returns risk and the importance of re-balancing.

  2. Great analysis as usual sir. But what percentage of equity do you recommend for retirees who have a long term outlook to outlast their savings as a goal which then require both protection and growth.

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