PERSONALISED INVESTMENT MANAGERS
The answer is “YES” and it is possible to make your retirement corpus survive such market corrections or crashes ONLY IF your Financial Planning, Risk Profiling And Asset Allocation are properly executed and are in place.
During the retirement period, everybody’s monthly requirements which primarily will comprise of all your BASIC NEEDS, have to be met through guaranteed fixed income products like Tax Free Bonds, LIC Pension Plans, Senior Citizen Savings Scheme and yearly partial withdrawals from PPF corpus. These guaranteed fixed income products are nowhere linked to equity market and will ensure that these BASIC NEEDS will be met as per the Plan. However, it is practically difficult or even impossible to plan entire monthly requirements only through guaranteed fixed income products due to the year on year inflation, and relatively lower fixed returns for such products and this will involve a very large retirement corpus to be created. Therefore, some portion of these monthly requirements which may mainly be for DISCRETIONARY SPENDING like a new car, or vacation etc must be met through SWP (Systematic withdrawal plan) route from Balanced Mutual Funds or liquid MF etc.
Along with monthly requirements, health related emergencies may also be expected to occur regularly post retirement and therefore, a corpus for such expenses must be maintained in bank fixed deposits (apart from health insurance), since not all medical expenses are met through medical insurance, and this medical corpus has to be continuously rebuilt if it is consumed. If the investor understands the prevalence of credit risk in liquid funds, they can maintain the same in liquid MFs to get additional 0.50%-1% return.
Let us assume that Mr. Murali requires around ₹1 Lakh pension every month with inflation adjusted at 6%pa.Approximately 70% of this requirement can be met through guaranteed fixed income products and the remaining 30% of pension can be met initially through SWP from Balanced MFs and whenever payouts have to be increased due to inflation in the future, the SWP amount has to be increased.
Apart from the corpus kept for monthly requirements as well as health expenses, the remaining corpus have to be invested into equity to get higher returns and same will also beat inflation over the period since equity is the only asset class which will always give inflation adjusted returns during longer term. Hence, if there is market crash, it is only this excess corpus kept in equity or Balance Funds, which will get impacted, and not the main corpus. This can be planned and implemented only if your financial plan and asset allocation are correctly implemented.
Historically, we have seen that market crashes or corrections are not prolonged. Here are 3 instances with details below:
1. From April, 1992 onwards, markets experienced a bear phase till April, 1993 and markets corrected around 56% during this period due to the Harshad Mehta scam and it was immediately followed by around 126% growth from April, 1992 to Sept, 1994.
These past bear phases depict that market corrections will not continue for prolonged periods and at some point, markets will find its own value and thereafter, it will start to recover. Almost in all previous bear phases, the duration was around 12-20 months and thereafter, markets started to recover.
Hence, Volatility in equity market is always going to prevail and still nobody will be able to accurately predict bull or bear phases and with volatility, the investor’s exposure towards equity will also experience the same rise or fall during bull and bear phases to the extent of the equity allocation. Therefore, understand the investors financial plan, risk appetite, asset allocation and fund requirement is of key importance before allocating to equity. But, it is very important for us to note that despite this volatility, markets will always grow along side with country’s GDP and in long term, and market returns will be a combination of inflation + GDP.
The true winners who invest in the stock markets are those who are disciplined , stay invested during volatile markets, and add during market corrections. In our example, since monthly living expenses and health related expenses have been taken care through fixed income products, it is wise for Mr. Murali to sit tight on our equity investments during bear phase of the market.
Apart from this, in the plan, a separate corpus has been maintained for monthly SWPs and payouts through SWP for traveling or other discretionary spending. And when markets are in a bear phase, it will be better if these expenses are minimized or postponed to certain extent until we pass this phase.
Proper Financial Planning and Asset Allocation done early are the sure ways of insulating your investments from Market Crashes and Bear Markets. Your retirement corpus can be sustained during market corrections and bear phases only if your main monthly expenses and core health related expenses are carefully ascertained and maintained in fixed income products. And, all your balance assets can grow with equity related investments or risk related investments with a 5 year plus time horizon, to achieve inflation adjusted returns, for discretionary spending and capital growth.
What is most important is to start planning for your future as early as you can for your peace of mind during such market crashes and bear phases.
If investors allot only their risk capital towards equity or funds which they don’t require for the next 5-6 years into equity, market crashes may come and go however, but the overall portfolio will survive and grow and give you inflation adjusted returns.
Therefore, Financial Planning and Asset Allocation with discipline is the key to superior returns and portfolio success during all phases of the markets.