In my earlier post here, I had discussed on the need for us to have a backup plan just in case something goes wrong.
Don’t get me wrong.
I am not predicting a crash, but just in case something like that happens, I don’t want us to panic and want you and me to be better prepared.
It becomes extremely difficult to make sensible decisions in a falling equity market as the emotional stress that we undergo will be tremendous. Given our usual tendency to overestimate our ability to handle these situations, the key thing during these times is to protect ourselves from “ourselves”!
While obviously, all of us will have slightly different plans based on our individual risk appetite, investment time duration, savings pattern and magnitude of invested amount, I am sharing with you my simple plan to give you a rough idea of how you can go about with this.
I am gradually building up to 3 months spending requirements in a liquid fund (DSPBR Liquid Fund) via a monthly SIP.
As a back up, I also have credit card spending limits which can take care of my 3 month spending requirements.
Final resort – Mere Paas Maa Hai! (don’t intend to use this option)
This is to ensure that even if there is some unforeseen emergency I don’t need to dip into my equities.
2.Fund your short term requirements (next 5 years)
As of now, I don’t have any major expenses (anything more than 6 month salary I classify as major expense) which I can foresee for the next 5 years.
So I will keep reviewing this once every 3 months.
If in case some short term requirement crops up, then I will start saving for it via an SIP in either a short term debt mutual fund or arbitrage fund. The SIP monthly amount required can be calculated from any online SIP calculator (such as the one here)
In a bear market, the last thing I want to do is to be forced into selling equities to address an unexpected emergency or a short term requirement.
With the above two buckets in place, I have reasonably addressed this problem.
Now its all left to “my behavior” and the ultimate test of whether I can hang on.
Putting your current portfolio size in the right perspective
Barring the above two buckets, my entire portfolio is 100% equity consisting of stocks and mutual funds. My personal target for this portfolio is to achieve a portfolio size of 20 times my salary in the next 15 years which technically means I become financially free when I am around 45 years old.
I personally think the markets are slightly expensive. So there is always an itch to play it “cute” – Should I take out some money and park it into safe assets such as debt funds and get back in post a correction.
This is a question that I keep grappling around as there is always an inherent urge to attempt to be the smart investor who buys low and sells high. Add to it the boasting rights that it will give me via the “I told you so” narrative. Its a heady combination indeed.
But instead of the elusive holy grail of market timing, I chanced upon a rather simple solution: Re-framing!
If I do a monthly investment of Rs 10,000 and assuming that I increase it by 5% in every year at 15% expected returns, I will end up with Rs 30 lakhs in the next 10 years and Rs 80 lakhs in the next 15 years. (Refer here for a detailed explanation on the calculations).
So based on my monthly savings that I currently do, I have a rough estimate of the amount I expect to achieve post 15 years.
The moment I put my current entire 100% equity portfolio as a % of the final value after 15 years it works out to be just around 6%. With this sudden shift in frame, the answer to “Should I act cute and try asset allocation strategies with just 6% of my targeted corpus” becomes obviously simple.
Note to me:
So dear Arun, as of now, just focus on what is in your control;
Try to earn more and save more. Just continue your monthly investments.
You shall save your intelligence and asset allocation strategies for some other time 😦
I believe a lot of us end up doing this mistake of overthinking and trying to act extra cute during the initial years of wealth building where in reality, its predominantly our ability to save which really matters initially. (I am no exception)
But obviously as our portfolio grows in size, we reach a point in time, where the returns from our portfolio is much larger than the incremental savings. This is the point where an SIP or monthly investing does little to address overall portfolio volatility (as the 100% equity portfolio has significantly grown in size and a 50% temporary decline like that in 2008 can emotionally derail us from equities forever. You can read more about this here)
So I have a simple thumb rule – if my portfolio size crosses 5 times my yearly salary that is when I start attempting to be cute and will implement asset allocation strategies. At this size, protecting my existing portfolio becomes as important as making it grow!
At this juncture, I am still some time away from this 5 times annual income cut-off and hence I shall continue my 100% equity portfolio and focus my efforts on saving and investing more monthly.
The Odysseus Contract
So how given this background how does my pre-commitment plan look like (for readers wondering what a pre-commitment plan or who the heck Odysseus is, please refer my earlier post here)
Current Sensex level: 34,000
So this is my plan at various levels
- 10% correction i.e rounding off to ~30,500 levels: Continue with monthly investments (Notes to me: other than this monthly saving you won’t have additional money to deploy in equities as expected. Today, at this juncture, you have no clue on what will happen. So suddenly don’t act like you-always-had-it-figured-out and regret on not having sold out earlier)
- 20% correction i.e rounding off to ~27,000 levels: Continue with monthly investments
- 30% correction i.e rounding off to ~24,000 levels: Continue with monthly investments (painful – but what else can I do)
- 40% correction i.e rounding off to ~20,500 levels: Time to sell x amount of gold assets (hope my wife isn’t reading this) + Continue with monthly investments
- 50% correction i.e rounding off to ~17,000 levels: Time to sell 2x amount of gold assets (hope my mother-in-law isn’t reading this) + Continue with monthly investments
That’s how my plan looks like 🙂
Obviously there are no precise right or wrongs. Your plan most probably will be different from mine. The overall idea is to give you a sense of how I go about with this.
Do let me know on how it works and if in case you want to discuss your plan with me, do reach out to me at firstname.lastname@example.org or comment in the below section.
As always happy investing and don’t forget to subscribe and share 🙂