Stocks can help you retire at ease!

In the long term, we all are dead, said economist John Maynard Keynes. But this is not a very good reason to not plan for your retirement! While the context of this article will revolve around why one should 'also' invest in equities for retirement planning, this has got nothing to do with the current bull market!

This is important to consider because the magnitude of returns that one has witnessed in the stock market in the last three years is not likely to be repeated every year. And aligning return expectations to one's risk appetite is very important while conducting the retirement planning exercise.

Why equities?

Coming back to how equities can help you in your retirement planning exercise, here is a graph that highlights the returns on Indian equities (represented broadly by the BSE Sensex). As is evident, the returns in the last three years have been 66% CAGR.

But if one takes a look at the returns over a 10-year period, the rates are more realistic and trace the Indian nominal GDP growth rates. However, it has to be mentioned that between February 1992 to July 2003, the BSE Sensex, on a point-to-point basis, was at the same level!

While it has not been a one-way ride, what the graph highlights is that equities can provide decent inflation-adjusted returns in the long term. And since retirement planning is a long-term activity, equities can be rewarding in nature.

How equities?

With 'why equities' cleared, now comes the critical question of 'how equities?' Conventional investment wisdom tells you that 'as age increases, risk appetite decreases.' And given the fact that equities are a high-risk asset class, the proportion of equity exposure in the overall portfolio should reduce with an increase in age.

But how much exposure should one have to equities is a function of your age and your goals (short-term and long-term). 'Your Asset Allocator Review' answers the 'How equities?' question with a pre-designed portfolio mix for various ages. The portfolio suggests how much equity exposure a person should have at various stages in conjunction with other asset classes.

At a younger age, in the equity portfolio, one can have greater weightage to high-risk stocks/sectors and as one's age increases, the weightage of low-risk stocks/sectors should increase. In equities, we suggest investors have a mix of direct and indirect participating.

Direct would involve buying a stock from the primary (IPOs) and secondary market (stock market), while indirect involves investing through the mutual funds route.

Which equities?

This is the trickiest question to answer! To simplify this process for investors, we have listed various sectors based on our assessment of risks from a long-term perspective. Of course, sector identification is one part; the more important aspect is to choose the right stock(s) from the sector.

Key aspects to keep in mind while investing in equities:

Given the fact that the value of money reduces over time, it is important to generate adequate returns to sustain the desired standard of living, even after retirement.

In our view, adequate and careful investing in stocks is one way to achieve this goal (of course, with the extra risk). As someone said: 'Life begins at retirement.'

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