Warning! A long-term financial goal will soon become a short-term financial goal!

Published: December 29, 2015 at 1:38 am

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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.

equity-investing-5

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.

Want to know how to reduce fear, doubt and uncertainty while investing for financial goals? Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community

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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Pattabiraman editor freefincalM. 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 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.
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