If your financial planner told you “The longer your time horizon, the more stocks you should own”. You need to tell him “Time isn’t everything. You must also consider I am a broker in the life insurance business!”
It’s one of the basic rules of thumb: The more years you have to recoup losses, the more aggressive you can be. Unfortunately, the math isn’t so clear-cut. While the odds of losing money shrink as the years go by, the worst-case scenario – you keep on losing – just gets worse and worse. If holding stocks for the long run really did make investing safe, mutual fund companies would gladly guarantee your balanced funds. They do not. Now you know why!
“We are all great at excel sheet creation and equity share analysis, but we put out money in Bank Fixed Deposits” is the statement of a top regulator who obviously remains anon.
Here’s a different way to think about how aggressive your total portfolio should be: Imagine that it includes not only shares, real estate, and bonds but also your human life value, meaning your ability to earn income by working. In most cases your ‘earning ability’ will be your primary asset for much of your life. The safer it is, the more chances you can afford to take with your other assets – that is, your ‘other’ or balance portfolio. The confidence that the ‘earning ability’ will repair any damage that you do to your portfolio is perhaps the greatest asset that younger people have. They do not realize that this ‘overconfidence’ allows (or makes) them commit mistakes like investing in poor quality assets without worrying about the capital destruction that they are doing to themselves.
Now, this cannot lead you to conclude that time no longer matters. When you’re young, after all, the value of your earnings potential far outweighs the balances in your portfolio. As you age, say beyond 50 the value of your human capital declines, and you’ll need to secure more of your investments. Though this age differs from profession to profession – doctors need to worry at age 65 and sportsmen at age 32!
So the conventional advice to hold a lot in shares when you are young and gradually trim back can still make sense for normal people. However it has to be tweaked depending on the profession. If you are in financial services, start worrying about the Human Life Value – that calculator has been recently scrapped by IRDA!
Tenured professors and Central government employees have human capital that resembles a triple-A-rated bond, especially when they have a solid pension plan. Those lucky souls can (not saying should, note) dive aggressively into equities and even stay there as they approach retirement. The human capital of a commission-based life insurance agent or a mutual fund salesman, on the other hand, is pretty clearly a B group share – and it’s not a blue chip. That person should own a fair amount of RBI bonds, even when young.
What to do?
Assess your human capital. A typical person’s income is like a balanced fund – some portion you are confident 70% like a bond and 30% like a share – like a pension fund! Use that as your base and then think about how long you’ll be working, the stability of your current job, the industry, is your boss Hari Sadu, and your ability to change careers if you have to. You may have seen in the past few months the past few months that your human capital is not as secure as you once thought. If you’ve been an aggressive investor, that alone may be a reason to shift more of your assets to safer ground.
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