A reader writes,” Sir, I read your 2021 personal finance audit, where it says, I have been investing for my son’s future since Dec 2009 (a month before he was born). Then it was an 18-year-old goal, and now it has become a 6-year-old goal. Last year I reduced the equity allocation from 67% to 55%. It is currently 56% (after rebalancing twice this year!). I might reduce this further in the coming months. My question is, are you still holding 55% equity?”
“If so, then why are you holding so much equity for a 6-year goal (soon to be 5 years)? Is this not contradicting what you recommend? Reduce equity exposure well before the goal deadline or no equity for a 5-year goal?”
Personal finance is primarily personal. When creating content on portfolio management, the recommendations will have to be generic. It is up to the individual to personalize it based on their circumstances which will differ from person to person. Even for the same person, circumstances can differ from one year to another and these have to be accounted for during periodic reviews.
Most people struggle to save enough for their goals. So they would get close to their target corpus only in the last few years of the investment journey. During this time, too much equity in the portfolio is risky. This is why we recommend a systematic equity de-risking strategy. This has to be implemented from day one so that the right amount of investment is made – our robo advisory template automates this calculation as per the requirements of the goal.
When someone is struggling to keep up with their investment schedule, it would be most imprudent to hold 55% equity when the need is only years away. These generic recommendations are quite safe when an investor is getting started. Once they gain confidence, they can modify it as per their needs.
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My situation is considerably different from what one can generally recommend. I had a target corpus in mind when I started investing for my son’s future. I achieved it bang in the middle of the investment journey thanks to investing higher than what was initially assumed and a good sequence of market returns (aka luck).
Also, regular rebalancing (two of those times were twice a year) has ensured there is enough corpus for a UG+ PG education in India in the fixed income instruments associated with the portfolio (two PPF accounts, ICICI Gilt Fund, ICICI Arbitrage Fund and a small portion in Parag Parikh Conservative Hybrid Fund). My son wants to pursue Physics research and astronomy as of now. If things change, we change accordingly.
So this allows me to take on considerable risk with the rest of the corpus and at the time being, I don’t mind holding 55% equity. Ideally, I would like to pay for his education using the fixed income instruments and merge the equity allocation with our retirement corpus but it is too soon to dream about that.
The point is, that once we factor in our personal circumstances and understand them well, we can modify qualitative or quantitative recommendations to suit our needs. We cannot manage money like robots without appreciating context.
Portfolio management is 50% planning and 50% playing it by ear according to circumstances. DIY investing is 30% prudence and 70% conviction/confidence to modify a plan. Today it is quite easy to devise a plan but only a few have the confidence to modify a plan according to personal needs. A SEBI registered fee-only advisor can help with this modification but we need the conviction/confidence to implement their recommendations!