Those people who want less volatility in their retirement portfolio should of course invest in less volatile assets. The examples for this are of course bank fixed deposits, endowment policies, PPF, and other government schemes.

There is only one hassle – as these savings products will yield close to zero or a slight negative real return, the savings will have to be huge. One of the best ways to lower the amount of (volatility) risk you need to take is to save more money. Saving more of your income now has a positive effect on your portfolio: the corpus grows faster,  and the amount of income it needs to provide you to maintain your pre-retirement lifestyle could also lowered. Consider an investor who makes Rs.20,00,000 per year and is saving 20 percent of gross income in hopes of retiring on an income of Rs, 13,00,000 per year. Using a 4 percent inflation-adjusted spending rate in retirement, that investor needs to work and save for 33 years prior to retirement. By instead saving 40 percent of gross income and planning to live on Rs.900,000 per year, the investor (saver?) now only needs to work and save for 19 years, which equals more than a decade of extra time in retirement. I do think it is outlandish to think so, but do remember that 98% of the Indian population does not invest in equities.

Most Indian investors prefer to invest in very ‘safe’ but low-returning investments like FDs, bonds, savings accounts, endowment insurance, government saving schemes, etc. These investments “appear” to be safe because the returns aren’t volatile. Rather they just appear to be safe, and are not safe unlike their counterparts like equities and real estate which look risky, but return a positive real return. An investor’s greatest enemy in wealth creation or kitty building is inflation. Even inflation of just 6 to 8 percent a year presents a formidable drag on investments that yield only 3 to 4 percent a year post tax. Nobody likes to see their investments drop – but people avoid seeing that by not looking at their Real wealth on a regular basis. Of course the risk / alternative is to reduce the standard of living while in retirement or face running out of money if you live longer than your ‘plan’ to live! Investors who prefer low-volatility investments have perhaps never run the numbers to understand what their choices mean.

For example, an investor who wants a portfolio to provide 50 percent of pre-retirement income but who achieves an investment return that only matches inflation (0 percent real) and wants a 25-year earning life will require a savings rate of 50 percent of gross income for each of those 25 years. I cannot imagine any professional who confidently talks of a 25 year earning life – and with such a high savings rate. It is virtually impossible. Or, the investor can work for 40 years while saving 31 percent of income. Again this may be possible only for a self employed professional or a businessman.  A more risk-tolerant investor who achieves a return that beats inflation by 5 percent, on the other hand, would need to save only 25 percent of income for 25 years, or 10 percent of income for 40 years, for achieving the same result. Almost all investors need to take on a significant amount of risk (volatility) in order to meet their long term financial goals.

While the general adage (wrong adage too!) that higher risk equals a higher return is true, there is no guarantee that higher risk will always lead you to higher returns. Also you will never be be compensated for taking some risks. A risk that can be diversified away is, uncompensated risk. An example of this is investing in a single share or even creating your own portfolio. As you can buy the top 30/50 shares by buying low cost ETF  you will not be paid an additional risk premium for investing in a single share – even if that share is Hdfc Ltd.

“What amount of risk should be taken in a standard portfolio of low-cost, diversified stock and bond ETF?” . Of course it depends on case to case basis, but the broad definition of investing according to one’s age can hold good for 99% of the investing population. Sure after one reaches a level of say 3 Million US $, these thumb rules may not apply, but these laws (like Graham’s 25% min and 75% max in equities) are good indicators and one will need some solid reasons to break those rules.

Owning equity shares, bond funds, and real estate is sensible rock solid investing. You are giving money on interest to somebody (bonds), or owning small pieces of profit-seeking enterprises, or allowing somebody temporary usage of your assets for a fee, and that is enterprise in itself. You are constantly assessing the risk and the commensurate reward for the same risk.

Make sure the amount of risk you’re taking on isn’t too much, or too little, to reach your goals.


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  1. Sir ,

    1. For common man it is impossible to find a financial adviser who’ll take care of his client interests .
    2. Index or other ETF has a fair amount of liquidity risk – why not prefer index fund over index etf – you can SIP in an index fund directly and it doesnt have brokerage fees and annual dmat charges . I’m amused if all experts say that we should be in equity for long duration then why do we need a product like ETF whose USP is that it can be traded on the exchange ?
    Though I’m interested in index funds , there are hardly any good index funds with AUM at least 500 crores .

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