Allocating Assets For Your Retirement Portfolio



We are glad to have you with us for our 4th Session on Retirement Planning - Allocating Assets For Your Retirement Portfolio

Alright so let's get started...

In an endeavour to live peaceful retired lives many of you may be investing in a host of investment avenues. But the question is: Are you allocating your hard earned money to the right asset classes? You see, asset allocation is an important ingredient in the endeavour to achieve your financial goals. It helps you to minimise risk in your portfolio and optimise the returns besides offering a host of other benefits which come along.

While benefits of diversification have been talked about widely for its merits, it quite often has been incorrectly or incompletely followed by many investors. If your asset allocation has gone awry, there is a high chance you may not be on the right track in your retirement journey and you may be left with a suboptimal corpus during your golden years.

So, in this session of money simplified, we will help you meaningfully chart your asset allocation which would help you achieve your ultimate goal of retirement effectively!

The Importance of Asset Allocation for Your Retirement

  1. One cannot ignore the risk which comes with an investment idea; no matter how luring or promising it sounds. You need to balance your risk-reward keeping in mind your age, your income & expenses, assets & liabilities, risk profile, and your investment time horizon.

  2. Prudent asset allocation can help you diversify your investible surplus meant to plan your retirement wisely across asset classes like equity, debt, gold, or even holding cash equivalents for that matter.

  3. Having exposure to more than one asset class optimally can work in your favour, because different asset classes react differently to the same set of factors in play and hence are subject to varying levels of risk.

  4. Asset allocation reduces dependency on a single asset class.

  5. Can help you manage your liquidity needs better during retirement.

  6. (And thus...) Asset allocation can set the right investment strategy.

6 Key Benefits of Asset Allocation

Benefit #1: Minimises your portfolio risk

  • If the retirement portfolio is well-diversified into various asset classes such as equity, debt, gold, or even cash equivalents risk can be reduced.

  • A prudent asset allocation helps you protect from market ups and downs.

Benefit #2: Optimises your portfolio returns

  • Through asset allocation, you can ensure that you do not invest in an ad-hoc manner, or else your retirement goal may not be achieved.

  • It helps you place a rational return expectation.

Benefit #3: Helps align your investments as per your time horizon

  • Along with the risk profile which is an essential facet while investing, the time left until your retirement is considered. This helps to draw a prudent asset allocation for your retirement portfolio.

    As a ground rule remember that if you are left with a sufficient or long time for your retirement (say more than 10 years), a predominant portion of your investible surplus can be parked in equities. On the contrary, when the time left until retirement is quite short (less than 5 years); it is best to avoid investing in equities and instead prefer investing in fixed income instruments. If you are left with medium term horizon (i.e. 5 to 10 years) you could maintain a healthy balance between equities and fixed income.

  • However, as time passes you need to review your asset allocation...and that should be done based on your age, change in financial circumstances, windfall gains, unexpected losses, besides change in outlook for a particular asset class. This helps you align your retirement portfolio wisely.

Benefit #4: Makes market timing almost irrelevant

  • A prudent asset allocation plan is charted taking into account your risk profile, your financial goals and your investment time horizon amongst a host of others; which makes timing the market almost irrelevant for you. This thus ensures that there's no digression from the financial plan charted for your long term financial wellbeing.

Benefit #5: Helps maintain adequate liquidity

  • Liquidity is also one of the vital factors while making investment decision. Sufficient liquidity helps you address your retirement needs.

Benefit #6: Minimises your tax outgo

  • A high incidence of taxation can he avoided if investment planning for your retirement is done well through tax-saving instruments or right asset class mix which facilitates minimisation of taxes.

But understanding which asset classes
are suitable is not easy...

You need to...

  • Understand risk-return trade-off of every asset class.

    * Equity, Real Estate, Gold
    (Source: PersonalFN Research)
    The aforesaid chart is for illustration purposes only and should not be construed as investment strategies / investment advice. Investors should consult their investment advisor and construct their portfolios based on their risk appetite, time horizon, investment goals, etc.

    As you can see, money market / cash equivalent / fixed income and debt instruments carry lower risk and thus generate lower returns vis-à-vis high risk asset classes like equities that have the potential to generate higher returns. The return potential of asset classes in your portfolio will be subject to the risk you are willing to take.

  • Moreover, you should keep your return expectations realistic.

  • You should calculate the required annual growth rate to build a respectable corpus for your retirement.

  • And while you do so, account for inflation wisely.

Defining Your Asset Allocation

Well, this is a daunting task. But one of the best ways to do it is by recognising the age bracket you happen to be placed under.

  • For Individuals between 25 to 35 Years having Time Horizon of 25 to 35 Years

    Life Stage - Accumulation Phase (Portfolio Type - Aggressive)

    (Source: PersonalFN Research)
    The aforesaid portfolio is for illustration purposes only and should not be construed as investment strategies / investment advice. Investors should consult their investment advisor and construct their portfolios based on their risk appetite, time horizon, investment goals, etc.

    As an individual if you happen to be in this age bracket, you are in the accumulation phase of your life. Hence you may be looking for wealth creation in the long run since you have sufficient time before you hang your boots. Apart from retirement, you may also have financial goals in the interim such as: buying a dream home, car, getting married and even save to begin a family and eventually plan for your child's future needs. So, given such a scenario you would need to prioritise each of your financial goals. Nevertheless, with a sufficient time horizon until your retirement, you can afford to take a higher risk with your retirement savings. Therefore there's scope to position your portfolio aggressively by allocating 65%-85% of your portfolio in equities and around 5%-20% in debt. Based on your preference you may also hold around to 10% to 15% exposure to gold to diversify further.

  • For Individuals between 35 to 45 Years having Time Horizon of 15 to 25 Years

    Life Stage - Mid-asset Accumulation Phase (Portfolio Type - Moderately Aggressive)


    (Source: PersonalFN Research)
    The aforesaid portfolio is for illustration purposes only and should not be construed as investment strategies / investment advice. Investors should consult their investment advisor and construct their portfolios based on their risk appetite, time horizon, investment goals, etc.

    If you are in this age group, you are in the mid-asset accumulation phase of life. You may be planning to buy a house, a car and invest for your child's education. You need to plan your income well and stream line it towards achieving your goals and life style. With a time horizon of around 15 to 25 years on your side, you can take a relatively higher risk to grow your retirement portfolio. Hence your portfolio can be positioned in the moderately aggressive risk profile by allocating 60%-70% in equity, 20%-35% in debt and holding 5%-15% in gold.

  • For Individuals between 45 to 55 Years having Time Horizon of 5 to 15 Years

    Life Stage - Protection Phase (Portfolio Type - Moderate)

    (Source: PersonalFN Research) The aforesaid portfolio is for illustration purposes only and should not be construed as investment strategies / investment advice. Investors should consult their investment advisor and construct their portfolios based on their risk appetite, time horizon, investment goals, etc.

    If you are in this age group, you are in the protection phase of your life cycle. In this age bracket, you may still have life goals to fulfil such as child's higher education, their marriage or even moving into a big house you've dreamt of. Hence this is a phase when you need to streamline your finances - both inflows as well as outflows. You see, you need to keep aside sufficient funds for your retirement portfolio; because there is a possibility that you may fall short on the corpus for retirement. But since you have a time horizon of 5-15 years you can afford to take some amount of risk rather than being too conservative. Hence your portfolio can be positioned moderately by allocating 40%-60% towards equity, 35%-50% towards debt and about 5%-10% in gold to hedge the portfolio.

  • For Individuals between 55 to 60 Years having Time Horizon of less than 5 Years

    Approaching Retirement - Portfolio Type - Moderately Conservative

    (Source: PersonalFN Research) The aforesaid portfolio is for illustration purposes only and should not be construed as investment strategies / investment advice. Investors should consult their investment advisor and construct their portfolios based on their risk appetite, time horizon, investment goals, etc.

    If you are in this age group, you are on the verge of retirement. These are your few final years before you hang your boots. Soon, your regular source of income would stop. Hence you ought to be conservative while investing your hard earned money. It would be not be advisable to have a high exposure towards equity. You should position your portfolio as 20%-30% in equity, 60%-80% in debt and 5%-10% in gold as a hedge.

  • For Individuals Above 60 Years - Already Retired

    Life Stage - Distribution Phase (Portfolio Type - Conservative)

    (Source: PersonalFN Research) The aforesaid portfolio is for illustration purposes only and should not be construed as investment strategies / investment advice. Investors should consult their investment advisor and construct their portfolios based on their risk appetite, time horizon, investment goals, etc.

    If you are 60 years and above, in all likely chances you may be retired. You have completed the conservation and protection phase of your life and have entered the distribution phase. By now you have limited income or even no regular income and thus at this stage one dips into his savings and reserves that has been built over the years. Hence while you invest to take care of your retirement needs, your portfolio needs to be positioned conservatively. Around 70% to 80% of your portfolio should be inclined towards fixed income generating instruments to generate post tax returns of at least 7% to 8% p.a. assuming annual inflation expectation is @ 7%; some portion, say 10%-25% of your portfolio can be in equities with a long term investment horizon of at least 5 years and about 5%-10% in gold as a hedge in your portfolio.

Do not forget to rebalance your portfolio

In this exercise of asset allocation, a need to rebalance the portfolio may arise.

  • Rebalancing refers to re-aligning or adjusting the holding in your portfolio. You should rebalance your portfolio as your age progresses or change in risk appetite - led by various circumstances, nearness to financial goals or even when the outlook for a particular asset class alters significantly.

  • It helps you to book profits (sell high) in an outperforming asset class and/or buy more of an underperforming asset class (i.e. ‘value buy').

  • Hence you should review your portfolio on a regular basis, say on a yearly basis, to check the need for realignment. This is because the allocation to an asset class may drift significantly away from the initial allocation due to appreciation or depreciation in its own value or appreciation or depreciation in the value of other asset classes.

  • Rebalancing would help you manage the risk to your portfolio and smooth out your portfolio returns.

Lastly, before we end this session here are some...

Points to Remember

  • Don't just invest in an ad-hoc manner for you retirement. Invest by prudently charting an asset allocation most appropriate for you.

  • While drawing your asset allocation consider

    • Age;
    • Income & Expenses;
    • Asset & Liabilities;
    • Risk appetite; and
    • Time horizon

  • Asset allocation is an important ingredient to achieve your ultimate financial goal of a peaceful retirement

    • It reduces dependency on a single asset class

    • will help you minimise risk and optimise returns of your retirement portfolio
    • makes market timing almost irrelevant
    • It will help you maintain adequate liquidity in your retirement portfolio
    • It sets forth the right investment strategy
    • But ensure that you review your retirement portfolio and if need be, rebalance it appropriately
So to end our learning exercise today, we now invite you to test your learning by taking up this simple quiz (and win exciting prizes!)

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