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Retirement investing 100% equity
The thinking goes, that they can then buy into stocks after the crash and ride the wave of future gains as the market recovers. Market timing is a nice story. However, research suggests that the stock market is efficient. If the stock market is efficient, all available information will be reflected in stock prices.
If you believe that the stock market is about to crash, there will be other investors that think the same way. That means the risk of a market crash will be reflected in current stock prices. The fact that risks are factored into stock prices, does not make it any more or less likely that something could happen in the global economy to cause a market crash. Nearly half of my portfolio would be wiped out by the time I was By this point, I would be 43 and allocating more of my portfolio to bonds.
How much, will depend on a number of factors including your total retirement assets, years to retirement, the amount of income you need to replace and comfort with risk. Perhaps the most critical thing for you to consider is your comfort with risk. A lot of people got spooked during the financial crisis and sold at the bottom of the market. If you are worried about that type of volatility then bonds can help smooth the ride.
How much should you have in Bonds? Bonds and in particular high-quality government bonds have a low or even negative correlation with stocks during market downturns. The standard stock-bond allocation for a diversified portfolio has been a split between stocks and bonds. Historically, a bond allocation has done quite well.
The average annual return of a portfolio in U. If a allocation feels a bit arbitrary another handy rule of thumb is the rule of The Rule of The rule of is a rule of thumb that says the percentage of your money invested in stocks should be equal to minus your age. If somebody is saying that if you retire, then you should retire your equity portfolio, I think it could be dangerous. Let me give you an example. Of course, it would not be tax-free but assuming that you will earn Rs 7 lakh every year, will translate into something like Rs 51, a month.
If you require Rs 51, today every month, five years down the line or three years down the line, you might need Rs 60, or Rs 55, or Rs 65, and if your capital remains constant and if you keep consuming the income, then you will be short of money and you will start eating your capital.
If you start eating your capital, your subsequent income will get reduced and you run the possibility of outliving your savings which could be a nightmare at an old age. So the only way to protect yourself methodically is two things. Reduce your expenses which could be non-negotiable because if you are getting older, it is very hard to reduce your expenses. It is much easier to increase your expenses with rising income. So downward revision is difficult. If you do not have equity, you are going to be in great trouble and it is important that investors get used to having equity and navigate through equity in a methodical way.
Most people have the perception of equity being risky. You should be regular with it, you should be investing for a long period of time and you should be investing methodically, you should not invest with a short-term view. You should not become a seasonal investor feeling you have to catch the bus when the market gets exciting.
Investing in equity has been a seasonal affair so far and that is why investors are wary of equity. Not investing in equity could be the most risky thing an investor can do. Now the problem is how can one appropriately select and make use of the NPS schemes because there are options and the investment schemes available for every type of investor who has a certain risk appetite? The investor should go for a very simple thing; one is to have all the information available on NPS plans in the public domain and look for the historic performance.
One should keep it simple. Everything is confusing if you want to confuse yourself. You have to really get through the clutter. For example, there are 3, mutual funds and you only need three or four mutual funds to plan your finances. Likewise you only have similar variants of NPS available but most of the variants are not meant for everybody. The state government plans are meant for state government employees, the central government plans are meant for central government employees, the Swavalamban plans are not available, Atal Pension Yojana plans are different.
So one should not be considering the alternative plans or investment avenues made available. Keep it simple. You need to choose one equity fund, one fixed income fund and maybe the fixed income that you decide can equally be split into gilt and corporate bonds. So you basically have three funds to choose and this is pretty straightforward. Only when you are likely to need the money sometime in the next four, five, six years, start reducing that and start moving that money to fixed income.
That is one of the great advantages of NPS that every year they rebalance it to which is a great feature because you are sometimes able to lock your profits by moving money from equity to fixed income and sometimes if the market has become very cheap, one is able to invest somewhat reasonably timing depending on that and it happens in a very disciplined way which no investor will otherwise do himself because emotions will drive you to act differently.
If anybody is investing in equity with a five year timeframe and more, one is unlikely to be in a situation when you do not earn as much as the fixed income and that is very important in your initial years. Let us talk about more options and more which are introduced in NPS.
How do you look at it and do you think it is really going to be effective? I think it is a very meaningful thing because NPS is a very effective, it is low cost, it is well managed, it has very close regulatory oversight and most of the users of NPS will be very naive users.
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