Last Updated on September 1, 2021
All long-term financial goals would soon become short-term financial goals. Perhaps it is obvious that with the passage of time that a goal 18 years away, will soon become a goal 3 years away.Children’s education goal is the best example of this. ‘They grow up so fast!”, we hear everyone say around us. Question is, what are we going to do about it?
In a recent post, we had discussed equity returns versus volatility (measured by standard deviation) and came with a suggestion for equity allocation for different investment durations.
Now imagine a financial goal, 15 years away and you have say, 60% equity allocation for that goal. After 5 years, it will be 10 years away and after 5 more years, it will be 5 years away. With this simple fact, which seems so obvious when spelt out like that, let us look at the above graph again.
It would not be prudent to have 50-70% equity exposure after 5 years. It would not be prudent to have 10-30% equity after 10 years. A long-term goal will soon become an intermediate-term goal and soon a short-term goal.
Therefore, the asset allocation must be tweaked must be periodically tweaked to reduce exposure to volatile assets – portfolio derisking. This is in addition to rebalancing –All about Portfolio Rebalancing with Calculators.
If would help if a derisking plan is in place years before it is actually implemented. Not only would this be more organised, but also factor in the correct amount necessary for monthly investment.
These tools will help you set up a derisking plan:
Asset allocation for long-term goals – before deciding on significsant equity exposure
Deciding on asset allocation for a financial goal – setting portfolio return based on assest allocatrion (equity:fixed income ratio)
Low-stress retirement calculator with flexible asset allocation
Financial Goal Planner with Flexible Asset Allocation
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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. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored three print books, You can be rich too with goal-based investing (CNBC TV18), Gamechanger, Chinchu Gets a Superpower! and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements, write to pattu [at] freefincal [dot] comAbout freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. 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)
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