Friday, September 25, 2015

Risk of equity in retirement

The recent bull run has given confidence to many people about their market understanding. People who were afraid of the word 'market' are now not thinking twice about direct equity. I hope, everybody is right in their conviction.

This post is about one such over-valued and over-estimated confidence. I met this guy who said that he is heavily into direct equity. I am naturally curious. I have no competence in that area and hence wanted to ask about his process.

He told me few things about stock selection. I could hardly understand anything as the terms used were that of highly professional. I told him about my lack of knowledge immediately.

He told me that it is extremely simple and it is not rocket science. He showed few more examples. Just as I was about to feel sorry for myself for being ignorant, he told me something which turned the tables. Now, it was my turn to tell him few words of caution.

In his eagerness, he has invested his dad's 90% of retirement corpus in market (direct equity and equity oriented mutual funds). I was shocked. 90% is too much.

Photo credit: Flickr - Daniel Rehn

His dad was in government service and retired with just good amount of money. He has some pension as well. The pension too is just equal to his expenses. So in theory, he does not need his retirement corpus in very near future. This is the reason why his son (i.e. my friend) put everything in market. Although, his father does not need money in near future, at least 5-7 years, I asked him to not go above 50-60% in equity. The main reason is ... yes... volatility. How would his retired father react or rather feel if his corpus is 50% wiped off. Technically, he can wait for market to enter bull run and then withdraw his money with profit. However, psychological factor is equally important. The volatility in the market should not make him stressed out. He is lucky enough to not to worry about day to day expenses (due to his pension). We should not compensate that by keeping all his money in volatile instruments!

Since, his son and myself are friends from a decade or so, we know each other's intentions. He could make out that this was not sales pitch or fear of skyfall. This was just out of concern. Fortunately, we both kept our egos out of this conversation and something meaningful was discussed. Now, his dad's portfolio is 40% in debt and 60% in equity markets.

I have asked him to keep one of his Sunday free so that I can learn about direct equity. Till then we wished each other good luck.

Readers: what are your views on corpus of such a retired person?