Ram, 55, connected with me to cross-check his investment strategy: to exit all equity investments, wait for the markets to fall and then reinvest. Obviously, I told him that no one can time the markets and asked him why he wanted to do so. Ram said he was trying to protect his wealth as he was going to retire in three-four years. He has two children, aged 23 and 18, and is the family’s primary income earner. He has a house which he resides in and another from which he receives rent. He invests in Employees’ Provident Fund (EPF), fixed deposits (FDs) and stocks.
Like many others, Ram had no structured financial plan and his investments were not linked to his goals. Pretty much everything was incorrect with Ram’s planning. He was focusing only on his stock portfolio, had no concrete retirement plan (he said he would be able to get some work till 65 years and didn’t need a plan) and the FDs, meant for his children, were not adequate.
Don’t have a closed mindset: After decades of investing, often investors have an anchor bias and believe what they are doing is correct. In Ram’s case, he was just not interested in even having a plan or understanding why one can’t time the markets. He only wanted an adviser to confirm his beliefs. Ram did not believe in paying fees to a financial planner or investing in mutual funds as he did not want to pay fund management charges. I do not think managing a portfolio of 30-40 stocks is easy for anybody and would any day prefer a mutual fund.
Don’t only focus on one area of your financial life: Stocks comprised 30% of Ram’s overall portfolio, but he was ignoring the larger allocation to FDs, which were not beating inflation.
Don’t depend on employment after retirement: Close to retirement, the focus needs to be on how to generate regular income to meet expenses in retirement. Do not assume employment income will be regular as it is not assured. With most fixed-return investments being taxable, Ram needs to use more tax-efficient instruments like a systematic withdrawal plan (SWP) in short-term debt funds (read bit.ly/2BYflyi). Before starting the SWP, he needs to be invested in debt funds for at least three years.
Don’t ignore the risks with “guaranteed” products: Investors tend to fall for guaranteed-return investments like non-convertible debentures (NCDs), bonds, jewellery schemes and company deposits. All these come with credit risk, which means they can default on payments, and concentration risk. Investor can lose their entire investment in case of default like it happened in the Yes Bank AT1 bond issue. Also, the post-tax risk-adjusted returns in most of these instruments are not great. Add to that, the liquidity is low.
Don’t wait for retirement to plan: Retiring in a bear market can be traumatic. Imagine your retirement corpus being 30% lower than what you expected it to be a couple of months ago. It would be better to redeem the equity holdings (to reinvest for monthly income) two to three years before retirement and move this to debt products, to protect your wealth against big market drops.
Don’t rely only on employer health plans: Have individual health covers early on (at least from the age of 50) so that you do not end up buying super expensive plans after retirement.
Don’t take loans for responsibilities after retiring: Use your assets instead. Ram’s daughter is yet to complete postgraduation and he will also have to spend for the weddings of his children. All these events are slated post his retirement. I always suggest investors to have their children contribute financially for education and marriage. Do not take gold loan, marriage loan or loan against property. Instead, exit the property and utilize the proceeds judiciously for some goals and keep the rest for your own needs. Indian parents feel it is their duty to leave behind assets for children, even at the cost of their own comfort. It’s better to have a liquid asset than an illiquid asset which also has low rental yield.
Plan well and you may not need a plan B!
Photo Credit: iStock
Source: Article written by Mrin Agarwal in Livemint
Originally published on: 15 Jul 2020