From young investor to seasoned pro: How to evolve your strategy with life’s changes

As you move through the various stages of life, your financial needs, goals, and risk tolerance naturally change—just like the terrain you’re driving through. What worked for you in your 20s might not be the best approach in your 50s. That’s where life cycle investing comes in. It’s a strategy that adapts your asset allocation as you age, making sure your investments stay in sync with where you are in life.

By tweaking the mix of equities, debt, real estate, and gold, you can keep your portfolio balanced, optimize returns, and manage risks as you move through life’s twists and turns.

The significance of multi-asset investing

Diversifying across multiple asset classes is a cornerstone of any robust investment strategy. Each asset class responds differently to market conditions, providing a buffer against volatility. For example, when equities experience downturns, assets like debt or gold can perform better, helping to stabilize the overall portfolio. Historical evidence supports this: during the 2008 financial crisis, global equities plummeted by nearly 40%, while gold appreciated by 5%, underscoring the value of a diversified portfolio.

The building blocks of a portfolio

In the Indian context, each asset class plays a distinct and critical role in achieving financial goals:

Equities: Equities offer the potential for high returns, albeit with higher volatility. Over the past 20 years, the Nifty 50 index has delivered an average annual return of approximately 12%, reflecting the growth potential of Indian equities. However, these returns are accompanied by significant short-term fluctuations, particularly in a developing market like India.

Debt: Debt instruments provide stability with consistent returns, often aligning closely with inflation. For instance, Indian government bonds and fixed deposits have averaged around 6-7% annually, just slightly above the inflation rate. This makes debt a safe but relatively low-growth component of the portfolio.

Cash: Cash is primarily used for liquidity and emergency needs. In India, a typical savings account offers around 3-4% interest, which barely keeps pace with inflation. Nevertheless, its accessibility and security make it essential for short-term financial needs.

Gold: Gold acts as a hedge against inflation, with average annual returns of around 8-9% over the last 10 years in India. Despite its significant short-term variability, gold remains a favored investment in Indian households, both for its cultural significance and as a store of value during economic downturns.

Adapting asset allocation across life stages

Early career: In the early stages of a career, the focus is typically on growth. With a long investment horizon, younger investors can afford to allocate a larger portion of their portfolio to equities. A common rule of thumb is to subtract your age from 100 to determine your equity allocation. For instance, at age 30, an investor might allocate 70% to equities and the remainder to debt, cash, and gold. This strategy leverages the power of compounding, where even small returns can grow significantly over time.

Mid-career: As individuals advance in their careers, financial responsibilities increase, such as buying a home, raising children, and planning for their education. At this stage, while equities should still play a significant role, the proportion might be reduced to accommodate more stable investments. For example, at age 45, an investor might adjust their portfolio to 60% equities and 40% a mix of debt, real estate, and gold. Historical data shows that a balanced portfolio of 60% equities and 40% bonds has returned an average of 7-8% annually over the last 50 years, with less volatility than an all-equity portfolio.

Pre-retirement: As retirement approaches, the focus shifts from growth to the preservation of capital and income generation. For someone in their late 50s or early 60s, the equity allocation might drop to 40-50%, with a larger share in bonds and cash to ensure liquidity. It’s also essential to consider real estate investments, especially if mortgage payments substitute for part of the debt allocation. Data from the Indian real estate market shows that residential properties have appreciated by 8-10% annually over the past decade, providing both a tangible asset and a potential income source through rentals.

Retirement: In retirement, the emphasis is on ensuring that the accumulated corpus lasts throughout one’s lifetime. Maintaining 12-18 months of expenses in cash or cash-equivalent instruments is advisable. The remaining portfolio should be structured to provide regular income, primarily from bonds, with some continued exposure to equities for long-term growth. Research suggests that a retiree withdrawing 4% annually from a diversified portfolio (a mix of equities and bonds) has a high probability of the portfolio lasting 30 years or more, according to financial planning studies.

Final thought

Wealth and financial goals are deeply personal, shaped by life experiences, risk tolerance, and individual aspirations. Consequently, asset allocation should be a dynamic process, evolving with the investor’s life stages and circumstances. By thoughtfully adjusting asset allocation over time, individuals can better navigate the complexities of life cycle investing, ensuring that their portfolio remains aligned with their unique needs and goals at every stage of life.

Chakrivardhan Kuppala, Co-founder and Executive Director, Prime Wealth Finserv Pvt Ltd