I was asked this question many times in 2008.

I said ‘I do not know, but it could take 10 years for the market to come to the same level as 2007’. I was wrong of course, but this was based on my previous experience – when it took a very long time for the market to recover from 1992 to say 2000.

Sadly, we will always go by our past experience, even when we know that it might not be accurate or right. However being prepared for a longer wait is better than being prepared for a shorter wait.

Do remember that the market will take a much longer time to recover in a distribution phase than in the accumulation phase. This is because in the acc phase you are STILL BUYING UNITS at lower levels in case of an SIP. For example in the past 2 weeks I did buy cement shares – it had nothing to do with global meltdown. I was just buying cement because of the huge infra projects funding that the government is planning and the expected improvement in the numbers. I will hold on for a few quarters at least if not longer.

Also in 1992/3 I was young and knew that I had a lot more earning time ahead of me, whereas if the market were to tank 46% today my loss would be huge, and I will be scared and my portfolio scarred! I might react very differently. Luckily I did well enough to be able to retire in 1999 – and the 2003-7 boom came as a bonus, but that was not really factored in. In 2032 I will be 70 years of age and may react very very differently towards a 30% fall in my equity portfolio, and recovery could take much longer.

How does one tackle this?

Simply by understanding one’s Asset Allocation based on one’s Risk Appetite. Unlike what some media friends think, AA is a dynamic concept BECAUSE Risk Appetite is a dynamic thing. As a person’s life situation changes, his RA changes and his AA has to change. For example if a person loses his job at the age of 55, he may suddenly turn conservative. I know a person whose son (who was dependent on him at age 32 as he was challenged) died and suddenly the need to create a life-long annuity went away. He and his wife suddenly had a bigger corpus for their retirement than what they needed. Just 2 examples, but I am sure you get the drift.

So create 3 expense buckets, and keep withdrawing from equities as long as the markets are rising. If the market falls by 10% or more, withdraw from the debt bucket or even from the balanced bucket! This will ensure that as one’s age increases, one will have less to lose in equities. Do remember however, that long bond funds could also lose money and be volatile.

If you made a mistake of being in MORE equity than what you should have been, you WILL panic. You will have to be careful about RA and AA. I like William Bernstein’s recommendation to limit your equity exposure in retirement to the maximum loss you could tolerate in a severe bear market. The loss will obviously be greater if you held 80% of your portfolio in stocks and far lesser if you held 40% in stocks. Also if a client is 80 years of age and is spending Rs. 1L a month, he may need to keep just Rs. 1.25 crores in debt to meet his lifetime spending needs. The balance he can keep in equities – and perhaps shift the dividends to debt – and still be cool about a fall. However a 55 year old may have to keep a similar amount and keep a hawk eye on equity, as this amount of debt may not be sufficient for his lifetime spending needs.

If you made a mistake of being in More equity than you should have, DON’T COMPOUND THAT mistake by withdrawing from equity when markets have hit a temporary bottom. Let us say you were 80% in equity in Feb 2018 and the sensex was 36000. Assume that in March 2018 the market falls to 27000 (assuming, not predicting) do not be in a hurry to WITHDRAW money from equity. Just wait for the smoke to clear and the fog to settle. If you have money for 2 years expenses in debt relax. Once the market comes back or improves to say 31000 remove some money from equities (assuming it is a retiree portfolio, not a portfolio in accumulation stage) and reallocate to debt. Your recovery time will be longer of course, but still much shorter than panicking at 27000 and withdrawing a lot more to re balance.


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