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Tracing the evolution of your investment portfolio with age

Oct 11, 2019 | 5 months ago | Read Time: 4 minutes | By iKnowledge Team

Mr. Raman was as conservative as they came. He had always lived in his father’s house; which he knew he would get when the latter passed away. His father’s method of saving was simple. He either gave it to his wife, who promptly put it in a jar, or he bought gold with it. Sometimes he bought gold ornaments and sometimes gold biscuits, but it was still gold. When Raman started earning, for a long time he did nothing. He had a bank account and the money accumulated in that. Finally prodded by his bank manager, he opened a few fixed deposits of varying maturities. Those were the days when interest rates were as high as 15% and he saw with satisfaction his corpus grow.  He never filed tax returns and so paid no tax on the interest earned.

When he started filing tax returns, he omitted to mention the interest income. He opened more fixed deposits in fact, as his income grew. By the time he retired interest rates had dwindled to 9% or even less. Raman however did not bother about investing anywhere. He preferred low risk investments that guaranteed a return.

He had however accumulated Rs 45 lakhs through the fixed deposit route. It’s been 15 years since Raman has retired and a large part of what he had has dwindled away. The interest income was insufficient for his living expenses and he has had to dip into the principal amount frequently. If it had not been for his daughter, a finance professional, he and his wife would have been awfully hard up.

The moral of the story is that it is a mistake to stick to a single type of financial investment forever. One’s portfolio must evolve with one’s progress through life.

One of the basic rules of investing is that progressively as we age, the portfolio risk should reduce. This is because evidence suggests that our risk-taking propensity declines with age and with change in our circumstances (with due exceptions).

A thumb rule is that the debt in the portfolio should equal one’s age. This is only a thumb rule and is always under contest by those who feel that age should not be a determinant of risk.

1.  In your 20s and single

When you are young, in your 20s and single with minimum responsibilities your capacity for risk would be high. Therefore, your portfolio should ideally have about 80% or more of equities. It is preferable if you invest directly in shares of some good growth companies that have a good performance record and look set to be in existence for the next 100 years. At this point in your life, you do not need to be worried by market volatilities because you have time on your side and markets will bounce back.

Incidentally, it would be a good policy at this time to buy a health policy and a life insurance policy with maturity benefits.

2. In your 30s, married with a child

For most people, the 30s decade is crowded. You are married, probably have children, your career has just picked up pace and you need to devote time to it and at the same time you need to buy a house etc. There’s a whole lot of responsibilities. At this point, you can reduce your equity exposure to 70% of your portfolio. A sound decision would be to invest in equity mutual funds (keeping your earlier equity investments intact). Fresh investments can go into tax saving mutual funds and some debt funds.

Since you have dependents, you need to increase your life cover and change your health cover to a family floater policy with a larger cover. A term cover that gives both death and maturity benefits can meet your needs. Aegon Life’s insurance plan allows the insured four options to choose from and provides coverage for 36 critical illnesses.

3.   In your 40s, with growing children

By the time you hit this stage, your expenses have already increased. This is a continuation of your previous stage and you would need to step up your investment in protection assets such as insurance. You can reduce your equity exposure to 60% of your portfolio. Now there will be other assets too such as a house, probably some gold, fixed deposits etc. You should have started a child plan with an eye on the education expenses of your children.

4.  In your 50s, pre-retirement

You are now in the slog overs and closer to retirement. Your children are probably grown up and ready for college. You have already provided for their education expenses and now you must tie the loose ends of your retirement fund. Remember the shares you invested in during the 20s? If you had been closely monitoring them all these years you should have made a sizeable amount by now. Your investments in equity schemes would also be looking healthy. You can put in more money into debt schemes now so that your debt to equity split is roughly half each. By this time, you should also have paid off your home loan so that when you retire you should be totally debt-free.

When you retire, you can still have about 30% in equity assets, as that will protect you against inflation risk. The bulk would be in debt funds or bonds and of course, your house will ensure that you do not need to spend on accommodation.

The evolution of the portfolio through your life requires some planning, monitoring and deciding which investment plan is best. To know about Aegon Life’s insurance products like term insurance and other products, visit our home page.


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