Khota Paisa

A Portfolio Without Equity

Posted in General by khotapaisa on August 21, 2009

Consider this –

Monthly Expense – 30,000/-
Net Monthly Saving – 45,000/-
Time to Retirement – 25 yrs
Post Retirement Period – 20 yrs
Employer Pension – None
Financial Goal – Retirement

What type of portfolio would you suggest? The most common (and generic) reply would be to invest in mutual funds and expect 12-15% return over long term.
Let me propose a radically different portfolio, one with no equity exposure. What if this person invest the full 25000/- every month in debt-based investments. Before analyzing the impact of this investment style, let me state the assumptions.

1. The monthly expenditure doesn’t include expenses like rent, school fee, premiums etc which will not be there after retirement.
2. The salary (and hence saving) rises enough to cover inflation. Af first it might look like a difficult assumption. But let me say that the chances of this assumption holding true over long term (25 years in our case) is way higher than getting 12-15% return over same period. And the data backs this every time. Even if you are in pulic sector job, your  salary rise over a long period will always( and has always) be more than inflation.
3. Investment in debt gives enough return to cover inflation

If your monthly saving (towards retirement) is not less than your expenses, every month you save today will fund one month after retirement. So, if you have more time left to retire than the post-retirement period (normally 20 years), you should be able to fund your retirement without taking any financial risk.

At the end, does it make sense? Given that all the three assumptions will hold true (practically always), I would say it is much less riskier than any other retirement alternative.

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