Subra, I have invested in a pension fund, an equity fund and a balanced fund for my Retirement. I do not like the value of my whole basket fluctuate – should I shift to a debt oriented basket? Fluctuation scares me, help!

Answer: Your question is not unique. Many (most?) people I meet have this question in their mind, I am happy you asked, because the answer is a little long – and perhaps a little complicated.

Actually, the longer that you have been an investor the more you realize that you cannot control the ‘returns’ you get on your investment, but you can control the risk. The better that you control risk, the better the return. In a retirement corpus, you must be concerned about return ‘of’ capital and not just return ‘on’ capital. Sadly, we underestimate the role of inflation in damaging the worth of our portfolio. It is important to not take on too ‘little’ investment risk, – and that is one of the most significant risks an investor faces. It can create a shortfall, or running out of money in retirement. The lower returns available on less volatile (wrongly thought of as lower-risk investments) WILL not allow your money to grow fast enough for your needs. You are already 43 years of age and have not created any significant corpus for your retirement. There is a range of risk for an investor to appropriately take, but there are far too many investors whose portfolios fall outside of that range. Benjamin Graham said ‘you must have between 25-75% of your portfolio in equities’. Of course he did not know Indian’s love for Real Estate!!

The amount of risk you take should be directly related to your NEED, ABILITY, and ATTITUDE to take risk. Most investors have a significant need to take on risk, but there are many who do not. With an equity penetration of 2% of the country’s population, you can understand that.  For example, an investor with a Rs. 5 crores portfolio who needs only Rs. 400,000 a year from it (and who is 80 years old) can eliminate almost all VARIABILITY and significant risk from the portfolio and still meet goals. He is past inflation risk, and he need not introduce complexity risk. He can be happy with just bank deposits and live the rest of his life. Most investors, however, aren’t that lucky nor do they have such a well created corpus! An investor with a Rs. 1 crore portfolio who hopes to spend that same Rs. 400,000 per year (and he is aged 55, and retired) needs to not only continue to add to the portfolio but also to take significant risk with it. His inflation risk is far higher than what he thinks it is.

Likewise, it is also very important to not exceed your risk tolerance. If you don’t have the emotional, and financial ability to withstand say a 46% fall in the value of your equity assets (circa 1993 it happened), a 100 percent shares portfolio probably IS NOT FOR YOU because once every few years the market is likely to do a heart rate check for investors! So if you have assets spread across real estate, equity, debt and some metals, you are likely to see a far lesser dent in your ‘net worth’ when the equity markets are testing your heart rate. Personally, I have insignificant real estate, but that is how I am. I am nudging the Graham’s limit of 75% – if I include my residence home!

http://www.subramoney.com/2017/01/how-much-risk-to-take-in-a-retirement-portfolio-part-2/