Asset Allocation - words that all of us have heard in our lives, right? Well, for the others, Asset Allocation is the decision of investing your money to different asset classes. Normally it meant putting say 50% in equity and 50% in debt for a 50-year-old! Well I am combining 2 things here - how much to put in Equity and how much to put in Debt at the age of 50 years.
I am personally not a big fan of thumb rules, but the one I am talking about here is a rule which says “you should have in bonds the same percentage as your age” - so a 30-year-old should have 30% in bonds and 70% in equities.
Today I am making some changes in the Asset Allocation Rules (which were made about 80 years ago, and is still the Gold Standard in the AA rules!). In a market that is so highly-priced (means the Price-Earning Ratios are high), Interest Rates are Low, but Rising, and Real Estate is going nowhere for the past decade how does a person invest?
Instead of the 60:40 portfolio for a Retiree, the Richer Retiree should do some experiment with their portfolio. Try the 40 (Indian Equity) 25% (Good Quality debt) and 35% in other assets.
Make no mistake - this is a higher risk portfolio and ONLY people with adequate knowledge should attempt this. My portfolio is being designed on these lines, and I have two advisors whose help I seek while doing this. Other assets means what? - assets that you UNDERSTAND - other than Indian Equity and Indian Debt which we have already talked about. This means assets like Foreign Equity, Venture Capital, Private Equity, Stressed Assets funding (high risk debt), Real Estate Investment Trusts, InVit, Real estate.
Those of you in the know must have realised that these assets are the high risk assets. When I say high risk, please read it as “can lose the whole thing, or part of the assets, are highly volatile, and returns can be lumpy, and liquidity can be pathetic”. This is the meaning of high risk. Do not go by the typical MBA phrase - ‘high risk, high return’ nonsense.
How will this help? Well, assuming you start investing in this third category - ‘Other Assets’ at say age 45, by the time you reach age 75 these assets could have added a lot of ‘extra’ returns to your portfolio. Use this to buy Annuities - at your age of 70, and say at 80.
From your age of 70 till 80, it is nice to reduce the complications, and 10 years is a good time frame to sell your illiquid (or less liquid) assets. Slowly as you sell these assets, keep buying ‘Annuities’ - I mean immediate or deferred pensions. Thus now at this age (of 70) you will keep reducing your allocation to equity, venture capital, private equity, foreign investments, Reits, simplifying your portfolio.
As said earlier, use the help of a financial adviser who will be able to help you with the procedure, asset allocation ratios, timing, etc. so that the investing process is smooth and your Golden age is really Golden.
PV Subramanyam
writes at www.subramoney.com and has authored the best seller ‘Retire Rich - Invest C 40 a day’