In this article, we discuss what investors should do if they have already achieved their target corpus years before when they actually need the money. Today this may seem like an unlikely scenario for most young investors reading this, but over the years we have encountered so many people who are in this situation.
Investing for long term goals have four major tenets: (1) Be clear about why we are investing and when we need the money. Without this, we cannot determine the risk necessary.
(2) Start investing as early as possible. This again helps in how much risk we can take. (3) Invest as much as possible and increase investments each year as much as possible. Wealth is primarily built by capital and only then by returns.
(4) Manage risk systematically and continuously with a specific goal target in mind. The biggest challenge among these four is to invest what is necessary for the goal. This is why luck also plays a big part in both fixed income and equity investing.
For example, the interest rates can be high during the investment tenure. This often is bad news because inflation is also likely to be high and there is little money to spare. However, some people because of their income or lifestyle can combat this and still manage to invest close to what they should.
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On the other hand, in stocks, the sequences of returns can be favourable with one or two life-changing yearly returns (eg. 80% or 90%) which can compensate for our low income and therefore investments.
Many people baulk at the idea of goal-based investing because they think “regardless of all these calculations, at the end of the day, we can only invest what we can”. This may seem logical at first sight. However, practically, many have to reduce their spending habits to accommodate savings and investing. Only a rigorous calculation can make them appreciate this. What they do afterwards is up to them.
A natural way to push ourselves to invest more is by taking into account how the equity risk is managed in the years to come – gradually reduced in steps or continuously. See for example Retirement planning case study: Helping Somnath retire by 55.
Anyone who has been following the above tenets and had a bit of luck is likely to have close to their target corpus or accumulated more. What should be done then?
- It depends on the goal. It is best to continue investing until retirement if it is for retirement. There is no need to make any asset allocation changes other than those already planned.
- If it is children’s education/marriage, then there are some options.
- Shift most of the funds from equity to fixed income and either stop investing or continue investing the same amount in equity and fixed income. The “extra” funds can be diverted to retirement later on.
- Find the present cost of education, ensure that much is available in fixed income every year, and continue normally investing in fixed income equity. Continuous reduction in equity is still recommended.
- Stop investing and shift most of the funds from equity to debt. Whatever is left in equity is “extra” and can be diverted to retirement.
- For other goals, make the purchase early if convenient!
In summary, having achieved the target corpus early is a happy problem to deal with. This is usually the outcome of discipline and a bit of luck. As we continue investing, our risk appetite evolves. Some of us may want to continue investing in equity and some of us may want to shift most of the corpus to fixed income. Both options are fine. However, the ket is to ensure at any point in time, enough funds are available for the eventual purchase in safe and non-volatile assets.
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