While using a model portfolio or age-based asset allocation can be a good starting point, do remember there is no one-size-fits-all when it comes to financial planning.
AMY ARNOTT, a portfolio strategist for Morningstar, advises readers to make sure to tailor their respective portfolio to get a better fit.
Amy lists some common cases where a standard asset allocation doesn’t fit all. You can read the original post here; I have taken four such situations and edited it to an Indian context.
1. You have a big chunk of your wealth in company stock
This will impact just a few but pay heed. Amy has talked with investors who suffered 7-figure losses when their employer’s stock turned south, and the emotional and financial impact can be devastating. It’s far more likely for a single stock to have large losses than a diversified mutual fund.
Take the time to figure out exactly how much you could lose if your company’s stock suffers a significant loss. Even a stock like Microsoft, which has been a stellar long-term performer, dropped close to 63% back in 2000 and 46% in 2008.
To avoid losses like that, it’s wise to prune back any stock holdings so they make up less than 10% of your portfolio. If you’ve received significant equity awards as part of your total compensation, though, it can be tough to do that without realizing hefty capital gains.
A concentrated position in company stock is effectively a supercharged dose of equity exposure (remember, this is also where you get your salary from, it is not just a portfolio exposure).
As mentioned earlier, don’t have any fixed allocation, view it relative to your overall net worth. Ensure that you are investing in other equity offerings and companies not in the sector you are employed in.
2. Your life span is shorter than expected.
You may be unfortunate to have a serious health problem that makes your life span shorter than expected. If you’re dealing with a terminal illness, then you have a host of other issues to take care of.
Of prime importance is that your portfolio must be conservative enough to meet higher-than-expected healthcare expenses and provide yourself with whatever you might need to make your remaining months and years a little more comfortable. So while another individual of the same age will have to keep a substantial portion of his/her portfolio in equity assets keeping in mind a long retirement, you will have the opposite to contend with.
Instead of being overcautious with spending, don’t feel guilty about spending down your assets if you find yourself in a situation where you need to.
Ensure that your Will is in place, and nominations too.
3. You don’t have sufficient assets to last through your lifetime.
This is frightening and very real.
If you are approaching retirement, but weren’t able to save and invest early in your career, your portfolio balance might be relatively low.
Take a hard look at your spending. This is the most important step you can take in this situation. Look at ways you can cut down. I suggest you read this post of an individual’s experiment on trimming down his lifestyle: How to defeat lifestyle creep.
It might be tempting to ramp up your equity exposure to try to make up lost ground. In actuality, it’s more prudent to take the opposite approach because a small portfolio has less room to absorb market losses. Keep in mind, though, that it almost never makes sense to keep 100% of your assets in cash and fixed-income securities, even if your financial picture is unusually dire. Thanks to the lower correlations between equities and fixed-income securities, adding a 25% stake in equities can actually reduce volatility for a fixed-income-focused portfolio.
You might also consider an immediate or deferred annuity, which can give you a guaranteed income stream and provide protection against outliving your assets.
Alternatively, you will have to look at delaying the start of your retirement or at least working part time.
You may pick up guidelines in Retirement Planning in your 40s, but frankly, it would be wise to consult with a financial adviser.
4. You and your spouse are not the same age.
This is quite common. In fact, a reader recently informed me that his wife is 24 while he is 32; and in the case of his parents, the age gap is a decade.
This has repercussions on the construction of a portfolio.
The younger spouse can afford to have a higher equity weighting and a more aggressive risk profile, while the older one will want to dial back risk. If you hold assets jointly, consider using a blended approach based on the average of your two ages.
To the point of sounding repetitive, I would again suggest consulting a financial adviser.
