The Indian stock markets have lost momentum for the past year. One can easily speculate reasons for the fall and wonder if we should stop investments or pull out money (we have started receiving such emails!). However, developing a simple market-independent strategy via systematic risk reduction would be far more productive.
Why? We have no control over market returns. Yes, asset allocation with regular rebalancing and diversification within each asset class will reduce this uncertainty, but we are still slaves to market turbulence. See, for instance: My retirement equity MF portfolio return is 2.75% after 12 years!
So a market-independent investment strategy aims to ensure any point in the investment journey, the current corpus is above or close to the required target corpus (at the time of review).
The benefits of doing this are obvious. We invest systematically and manage risk in the portfolio, regardless of market conditions. There is no need to follow market news or market valuations. No need to take media “experts” seriously and worry about what to do. Once set up, the systematic management can be run on auto-pilot with no more than 30 minutes of portfolio review once a year!
Steps to systematically reduce portfolio risk
- 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 0than ten 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. How will we reduce the equity exposure so that the overall corpus does not deviate too much from the target corpus? The target corpus and the amount invested must be calculated using this asset allocation plan. This is automatically accomplished with the freefincal robo advisory tool. The supporting backtest is here: How to reduce risk in an investment portfolio.
- Equity exposure can be reduced in a step-wise manner or continuously. Either way, this must be done well before the goal deadline. See or example: I am 30 and wish to retire by 50 how should I plan my investments?
- 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 per the variable asset allocation plan. The use of simple products like index funds will make the portfolio review even simpler.
- If the need arises, one can shift gains from equity to debt after a huge market upswing (e.g. Mar 2020 to Sep 2021). This will further reduce portfolio risk. See: I rebalanced my retirement portfolio twice this year thanks to the bull market.
In the second part of this article, we shall present examples of goal-based risk management.
Get free money management solutions delivered to your mailbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
That is it! This simple strategy will help you achieve your financial goals independent of market conditions. We have extensively backtested different variable asset allocation strategies, and the results are available in our goal-based portfolio management course.
To be continued …
🔥Enjoy massive discounts on our courses and robo-advisory tool! 🔥
Use our Robo-advisory Excel Tool for a start-to-finish financial plan! ⇐ More than 1000 investors and advisors use this!
New Tool! => Track your mutual funds and stocks investments with this Google Sheet!
- Follow us on Google News.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Join our YouTube Community and explore more than 1000 videos!
- Have a question? Subscribe to our newsletter with this form.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Get free money management solutions delivered to your mailbox! Subscribe to get posts via email!
Explore the site! Search among our 2000+ articles for information and insight!
About The Author
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 nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or 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 investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3000 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 what the market condition is!! 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.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 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 who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu gets a superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low volatility stock screeners.
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our Youtube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)