Adjust your asset allocation to your age

The views and opinions expressed are of Mr. Arun Thukral, MD & CEO, Axis Securities.

Wealth creation is a long-term exercise which requires a dedicated and planned approach to effectively manage the evolving financial requirements without losing sight of the end goal. While your short-term financial goals may differ, in the long-run all investors aim to build sufficient wealth for a comfortable life. To realize this goal, saving consistently and aggressively is important. But saving alone will not accumulate enough resources to be financially stress-free, given rising inflation and dwindling income in advanced years of life. It is, therefore, equally crucial to make your money grow through smart investments. Creating a healthy investment portfolio is thus the key that unlocks the door to financial self-sufficiency at every stage of life.

Many investors struggle with the concept of building a perfect investment portfolio as they lack clarity on what it entails. To make it simple to understand, a healthy portfolio is one where assets are allocated judiciously (to stocks, bonds, and cash) and are diversified adequately (to ensure that all the eggs are not put in one basket). Depending on your financial goals and your risk appetite, you can design a growth, balanced or a conservative investment portfolio. However, it is important to note that asset allocation is not a one-time decision. It is a process that involves life-long adjustments and fine-tuning to take care of your changing financial needs. While this process varies from individual to individual, few simple rules can help you to allocate your limited resources more efficiently in line with your evolving needs at different life stages. 

Just starting out 

Characteristics: Investors in the age bracket of 20-30 years are at the start of their professional journey and are focused on building their careers. With their newfound financial independence, their expenses tend to be higher. They yearn for newer experiences and seek instant gratification. They pursue big life goals and are open to the idea of saving and investing but their limited understanding of financial planning becomes a challenge. Hence, they rely on family and friends for advice to make the most of their money. Fewer liabilities and responsibilities act in their favor and give them an edge in the wealth creation process.  

Viable strategy: Age is on your side. You easily have 40 years in your hand before you retire from active employment. This is enough time to build a handsome corpus of funds by leveraging the magic of compounding. Limited liabilities makes it possible for you to take more risk and include a higher proportion of growth instruments like equities in your portfolio. With rising income levels, you can add some debt instruments to your portfolio for your short-term financial needs. This is the time to build an aggressive portfolio to make your money work hard instead of locking it in FDs. 

At career peak 

Characteristics: Investors in the age group of 30-50 years tend to have more clarity of their career progression and are already on their track to reach the peak of their career. This stage of life coincides with a peak in pay as well. With marriage and children, their financial liabilities tend to increase. Most have a car or a home loan to repay.  They become more serious about money management and are willing to seek professional help to optimize their investments. 

Viable strategy: You have to look after the financial needs of your family in addition to your individual goals. Your ability to take risks reduces as you have to provide for your dependents. However, you need higher returns on your investments for goals like children’s education/marriage which seems to be nearer now. If you have not started financial planning earlier, you would still be required to invest a major portion of your savings in stocks as compared to bonds. In case you have already started investing towards these goals, you can relook at your asset allocation to build a balanced portfolio with an equal distribution of assets to equity, debt and cash.

Nearing retirement 

Characteristics: Investors in the age bracket of 50-60 years are near retirement. With children all grown up and possibly financially independent, their responsibilities are lower. However, they come close to face the inevitability of a drying steady income flow.    

Viable strategy: At this age, you cannot afford to take risks with investments. Do not get into a panic mode if you have not accumulated enough resources as per your projections. Seek professional help to work around your savings and investments. Ensure that your portfolio comprises less of risky assets like equity and more of bonds and cash. 

Retired 

Characteristics: Investors retire at the age of 60. At this stage, their liabilities are limited, if planned well, and so are the sources of income. Medical emergencies and expenses are quite common. The quality of life at this stage depends on competent financial planning done earlier. 

Viable strategy: This stage does not mean that you should stop investing money and rely on the funds that you have accumulated so far. You should rather aim to deploy your investments in such a way that returns from the same serve as a steady flow of money for your daily needs. Go for options that offer decent returns coupled with security. Make your investment portfolio a conservative one with a higher proportion of bonds but do strive to include a few stocks. 

Thumb Rule - 100 minus age

If you still feel lost, apply this simplest model of asset allocation. As per this rule, one should subtract the current age from 100, the resulting number is the percentage that must be allocated to equities and remaining to the debt or other asset classes. As an example, a 30-year-old investor could use this guide to invest 70% of his/her portfolio in stocks and 30% in bonds.

This rule thus broadly says that older investors should allocate less of their assets to equities. While this serves as a general guidance, investors should exercise some discretion and consider their unique financial situation before following this rule blindly.

You must plan your investments at every life-stage and ensure that your portfolio is adjusted to your changing financial landscape. By starting to save early and following the above approach to asset allocation, you can accumulate enough resources to lead a financially independent life by reaping the benefits of efficient financial planning. 

Originally published in DNA Money, Nov'18.