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Planning for Equity Allocation

In this article we can get into the more specific aspects of building a portfolio that fits your needs, guiding you to plan your asset allocation accordingly.

Now that you have understood the basics of investing, we can get into the more specific need of building a portfolio that fits your needs. Along with keeping in mind your risk appetite, it is firstly important to identify your age factor, earnings, and objectives for creating wealth. Keeping in mind that we can't have a 'one-size-fits-all' strategy, we have discussed broadly the different and necessary key assumptions required towards an investor:

Being single

As the old saying goes, what the wise man does in the beginning, fools do in the end. When you're young and without a care in the world, life seems perfect. If you haven't crossed the 30 mark, and are still single, planning for your retirement or even your future seems a distant thought. But wise are those who start planning from the start!

Life as a singleton is often a lot more carefree and individualistic. You tend not to think of additional responsibilities such as kids, housing, schooling etc. it's all about working hard, partying harder and living it up. But somewhere reality sets in and that's when you start preparing to plan for your future.

Asset allocation portfolio for a singleton
  Single
< 30 years 30-45 years 45-55 years > 55 years
Carefree Building Wealth Adding To Wealth Carefree Retirement
Large cap 70-80% 60-70% 70-80% 80-90%
Mid cap 5-10% 10-15% 10-15% 0-5%
Small cap 5-10% 10-15% 0-5% 0-5%

As a young and single individual, under the age of 30, you would enjoy a carefree lifestyle. As a single person you would have lesser earnings due to a single source of income, and would most definitely have more expenses keeping in mind the way most people enjoy a high profile lifestyle. Then, for a person like you, the best kind of investments would be those of investing into safer large cap stocks which would ensure a safe return at the end of a longer tenure.

As you progress through the years and become stable in your career, your income starts to rise and you can ideally afford to take a slight amount of risk towards wealth creation. It would be advisable at this juncture to invest in mid and small cap stocks as you cross 30 years of age.

Mid and small caps are usually suggested at this juncture as they bring higher returns in a shorter span of time or even if you invest in small caps for a long period of time they will bring you higher returns than that of simply investments in large caps.

As your age advances, the inherent urge to take risks reduces. So, as you approach the 45 to 55 age bracket, you would want to take lesser risks, and therefore your concentration shifts from simply building wealth as you may have done earlier, to adding to your wealth. At such a stage, the majority of your portfolio (70-80%) should be in large caps. This not only ensures safety of the original capital invested, but also ensures safer returns on the said capital.

Once you cross 55, it's all about looking towards building a safe retirement plan at around 60. This is the time to start increasing allocation to safer stocks - large caps. Allocation to mid and small caps should reduce, while the same towards large caps should increase to 80-90% of the total portfolio.

Two's company

There are those who enjoy their single status in life, and then there are those for whom life is about having someone to share it with. Sharing joys and sorrows, sharing health and wealth, it's all become about being a couple for some.

Asset allocation portfolio for a person who is married and has no kids
  Married- No kids
<30 years 30-45 years 45-55 years >55 years
Property Top Priority Building Wealth Planning Retirement Carefree Retirement
Large cap 70-80% 60-70% 70-80% 80-90%
Mid cap 5-10% 10-15% 10-15% 5-10%
Small cap 5-10% 10-15% 0-5% 0-5%

There is a famous acronym for working couples in the West - DINK, deciphered as a 'Double Income No Kids' family. This concept is also now being adopted within the Indian culture amongst the youth, who work harder to earn and enjoy spending their wealth between the husband and wife only.

However despite the 'double income', as a married person you would still have more expenses compared to the earnings as there is a second person to fend for as well. The most practical approach to investing at this point would be to invest a greater portion of your equity investments into safer large cap stocks.

Similarly as it is with singletons, once you cross the 30 age mark and your income has risen, there is a sense of having achieved financial stability. You feel more secure in your financial growth and hence find it easier to allocate a slightly larger amount (10 to 15%) as opposed to earlier towards small and mid cap stocks, in order to generate wealth.

Once as a couple you reach the circle of 45 to 55 years of age, you usually start thinking and planning for your retirement as opposed to creating wealth for purposes such as buying a house, holidays, jewellery etc. Hereon it would be best to allocate a significant portion of your funds (70-80%) towards large caps and pare down the investments in small caps.

Once the magical number of 55 years hits you, the main focus remains the retirement plan you have been building. As a couple without children to support them after retirement, this is a very important corpus. It would be best to further increase allocation to safer large cap stocks while reducing allocations to mid and small caps, so as to ensure that you have built a safe and secure corpus funding for your retirement.

Family matters

There is a famous line - 'Small family, happy family', but where exactly is that line drawn today? Would it end at being a happy couple, or would it end with the proverbial husband-wife and child scenario? If we were to go by the population of India, it would most definitely be a family inclusive of kids. Yes, there are the rare exceptions to the norm, but on an average the idea of a happy family consists of a set of parents with 2 kids.

Asset allocation portfolio for a person who is married with two kids
  Married-2 kids
<30 years 30-45 years 45-55 years >55 years
Property Top Priority Planning Children's Future Property For Children Retired/Children On Own
Large cap 70-80% 50-60% 70-80% 80-90%
Mid cap 5-10% 25-30% 10-15% 0-5%
Small cap 5-10% 5-10% 0-5% 0-5%

Being a married couple is not easy and especially if you are a married couple with 1-2 kids. Your main priority at the age of 30 or so would be to ensure you provide your family with housing. A crucial factor at this point would be that even if there are two incomes, the expenditure would most definitely be more, given the fact that there are more than two mouths to feed. It would be best for you to allocate a greater portion of your equity investments into safer large cap stocks.

As you cross the 30 year mark, the main focus would be creating wealth for the future needs of your children. As kids start growing up the responsibilities that arise along with them need to be addressed and planned for in advance - such as children's education, marriage and property plans too. At this juncture since your earnings have increased and your career has gained more stability, you are better positioned to take more risks towards portfolio management. Hence you can invest a slightly large sum (10-30%) towards mid and small cap stocks.

As you grow in age, so do your kids and so do their needs and demands. Once the 45 age mark is crossed, your main concern becomes fulfilling the immediate concerns of your kids lives, such as their growing needs of higher education and perhaps even marriage plans, within the time span of another 5 years or so. Keeping this time factor in mind it is best to redirect your equity allocation more towards large caps (70-80%) which will bring you safe returns, and minimise your sum invested in Small and midcap (5-15%).

Once your children have been educated and are settled with their own lives, you tend to be concerned with your own plans of creating sufficient wealth for an easy and relaxed retirement, which will soon be approaching. At this point it is best to switch most of your allocation into large cap stocks, while reducing investments in small and mid caps stocks.

Conclusion

There's a saying "Boulders we cross, it's the pebbles that we stumble over". That is exactly what happens as we strive hard to build our wealth. We work hard, scrimp, save, make adjustments and finally save money - for us, our dreams, our children and their dreams. Somewhere, however, we are so busy trying to survive in our race against time that the money that we earn so hard is invested quite quickly, without giving it the much needed thought - 'are our investments are in tandem with our current and future needs?' This is where the mantra of asset allocation comes handy.

Asset allocation ensures that our expectations from our investments, our dreams for our future and the way we invest money are all in sync with each other.

» Next: Are you a humming bird or an albatross?

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