1. In reality, equity MFs are a 5-yr+ long-term risk-taking market-linked investment, and not simple and straightforward with protection.
2. Having said that, our obsession with capital protection is harmful for wealth, as it is not possible to put our money to use and protect it as well, and investment returns can come only when it is made to work.
3. If we can take risks in purchase of other movable and immovable assets, we can have a similar approach to our investments too, instead of seeking protection at all times.
4. Any asset-building activity cannot be done without taking risks, and future performance of financial assets is an unknown variable for all investors, with even best-managed businesses and well-thought out strategies misfiring.
4. Instead, we can just concentrate on avoiding risky mistakes like:
a) Having no asset allocation strategy, including emergency fund,
b) Overweighting on high-risk, non-diversified funds, and duplication in same categories,
c) Assuming short-term returns as long-term returns during goal-setting,
d) Funds not matching our risk profile or appetite, and
e) Investing beyond our net surplus.
5. We can reasonably safeguard ourselves better against global volatility (FIIs, trade wars, etc.) or national volatility (currency, oil price, inflation, etc.), for multiple ever-changing reasons beyond our control, by:
a) Being real about our job and income,
b) Rechecking our insurance plans,
c) Repaying our debts and avoiding leverage,
d) Realigning our assets to our needs,
e) Protecting our core asset allocation and cutting out the froth,
f) Tightening our expense belt,
g) Providing a stable foundation to our finances by taking adequate medical and other insurance covers,
h) Creating a contingency reserve against unexpected events.
i) Staying the course on money allocated to original goals without getting swayed by market noise,
j) Reviewing, rebalancing and ensuring that our money is spread adequately across all asset classes, and
k) Maintaining a proper balance
between all investments to allow our portfolio to gain from any rebound tomorrow.
6. A third of our money in equity UPON retirement is considered appropriate, and emnates from the "100 minus your age" thumb rule of investing, which is actually Equity Exposure Ratio (EER), where EER=100 minus your age.
7. It is widely used for portfolio asset allocation to determine the Equity corpus for achieving long-term goals.
8. As per this rule, we should maintain an equity percentage exposure of 100 minus our age at all times TILL our retirement, with the rest being in fixed income and other assets.
9. So, if our age is 30 years, our equity portfolio should be 70%, and when it is, say 65, upon our retirement, our equity portfolio should be 35%.
10. It is based on the premise that the number of working years left decides our ability to invest in risky assets, and the lower our age, the higher is our capacity to stomach risk, because we can even afford to continue till our investment bounces back in case of a downturn.
11. While ability to take risks differs across individuals, it should gradually come down as we grow older, although other factors also need to be taken into account before deciding this.
12. Those following this mechanical asset allocation need to stick to the financial plan regardless of market conditions, because rebalancing should also take place automatically.
13. So, equity component will go up in a bull market and this should result in moving a part of our equity assets to debt component, and vice versa during a bear market.
14. Upon retirement, a Hybrid Equity Aggressive fund (erstwhile Balanced Equity fund) can serve this purpose adequately and automatically.
15. While this rule is sacrosanct, a young long-term investor should now read it as “110 minus age”, at least during his earning years, keeping age longevity, sustained inflation and market volatility factors in view, i.e. equity should be a bit more than the thumb rule during asset allocation for achieving long-term goals.
2. Having said that, our obsession with capital protection is harmful for wealth, as it is not possible to put our money to use and protect it as well, and investment returns can come only when it is made to work.
3. If we can take risks in purchase of other movable and immovable assets, we can have a similar approach to our investments too, instead of seeking protection at all times.
4. Any asset-building activity cannot be done without taking risks, and future performance of financial assets is an unknown variable for all investors, with even best-managed businesses and well-thought out strategies misfiring.
4. Instead, we can just concentrate on avoiding risky mistakes like:
a) Having no asset allocation strategy, including emergency fund,
b) Overweighting on high-risk, non-diversified funds, and duplication in same categories,
c) Assuming short-term returns as long-term returns during goal-setting,
d) Funds not matching our risk profile or appetite, and
e) Investing beyond our net surplus.
5. We can reasonably safeguard ourselves better against global volatility (FIIs, trade wars, etc.) or national volatility (currency, oil price, inflation, etc.), for multiple ever-changing reasons beyond our control, by:
a) Being real about our job and income,
b) Rechecking our insurance plans,
c) Repaying our debts and avoiding leverage,
d) Realigning our assets to our needs,
e) Protecting our core asset allocation and cutting out the froth,
f) Tightening our expense belt,
g) Providing a stable foundation to our finances by taking adequate medical and other insurance covers,
h) Creating a contingency reserve against unexpected events.
i) Staying the course on money allocated to original goals without getting swayed by market noise,
j) Reviewing, rebalancing and ensuring that our money is spread adequately across all asset classes, and
k) Maintaining a proper balance
between all investments to allow our portfolio to gain from any rebound tomorrow.
6. A third of our money in equity UPON retirement is considered appropriate, and emnates from the "100 minus your age" thumb rule of investing, which is actually Equity Exposure Ratio (EER), where EER=100 minus your age.
7. It is widely used for portfolio asset allocation to determine the Equity corpus for achieving long-term goals.
8. As per this rule, we should maintain an equity percentage exposure of 100 minus our age at all times TILL our retirement, with the rest being in fixed income and other assets.
9. So, if our age is 30 years, our equity portfolio should be 70%, and when it is, say 65, upon our retirement, our equity portfolio should be 35%.
10. It is based on the premise that the number of working years left decides our ability to invest in risky assets, and the lower our age, the higher is our capacity to stomach risk, because we can even afford to continue till our investment bounces back in case of a downturn.
11. While ability to take risks differs across individuals, it should gradually come down as we grow older, although other factors also need to be taken into account before deciding this.
12. Those following this mechanical asset allocation need to stick to the financial plan regardless of market conditions, because rebalancing should also take place automatically.
13. So, equity component will go up in a bull market and this should result in moving a part of our equity assets to debt component, and vice versa during a bear market.
14. Upon retirement, a Hybrid Equity Aggressive fund (erstwhile Balanced Equity fund) can serve this purpose adequately and automatically.
15. While this rule is sacrosanct, a young long-term investor should now read it as “110 minus age”, at least during his earning years, keeping age longevity, sustained inflation and market volatility factors in view, i.e. equity should be a bit more than the thumb rule during asset allocation for achieving long-term goals.