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Asset allocation – words we’ve all heard in our lives, right? Well, for others, asset allocation is the decision to invest your money in different asset classes. Normally this meant putting say 50% in equity and 50% in debt for a 50 year old man! Well, I’m combining 2 things here – how much to put in equity and how much to put in debt at age 50.
Personally, I’m not a big fan of rules of thumb, but the one I’m talking about here is a rule that says “you should have the same percentage in bonds as your age” – so a 30-year-old man should have 30% in bonds and 70% in shares.
Today I’m making some changes to the asset allocation rules (which were made about 80 years ago, and are still the gold standard in AA rules!). In such an expensive market (meaning high price-earnings ratios), interest rates are low but rising, and real estate isn’t going anywhere over the past decade, how does a person invest -she ?
Instead of the 60:40 portfolio for a retiree, the wealthier retiree should experiment with their portfolio. Try the 40 (Indian stocks) 25% (good quality debt) and 35% in other assets.
Don’t get me wrong – this is a higher risk portfolio and ONLY people with the proper knowledge should give it a try. My portfolio is designed along these lines, and I have two advisers whose help I ask for this. The other assets mean what? – assets that you UNDERSTAND – other than Indian stocks and Indian debt which we have already discussed. This means assets such as foreign equities, venture capital, private equity, stressed asset financing (junk debt), real estate investment trusts, InVit, real estate.
Those of you who are in the know must have realized that these assets are the high risk assets. When I say high risk, please read it as “may lose some or all of the assets, are highly volatile, and returns can be lumpy, and liquidity can be pathetic”. This is the meaning of high risk. Don’t be fooled by the typical MBA phrase – “high risk, high reward” nonsense.
How will this help? Well, assuming you start investing in this third category – “Other Assets” at age 45, by the time you reach age 75, those assets might have added a lot of “extra” returns. to your wallet. Use it to buy annuities – at your age of 70, and let’s say 80.
70 to 80 is nice to reduce complications, and 10 years is a good time frame to sell your illiquid (or less liquid) assets. As you sell these assets, keep buying “annuities” – I mean immediate or deferred annuities. So at this age (from 70), you will continue to reduce your allocation to equity, venture capital, private equity, foreign investments, REITs, simplifying your portfolio.
As said before, use the help of a financial advisor who can help you with the procedure, asset allocation ratios, timing, etc. so that the investment process goes smoothly and your golden age is truly golden.
writes on www.subramoney.com and is the author of the bestseller “Retire Rich – Invest C 40 a day”