Thinkinvestor. Equity for long term?

Individuals want to derive the benefits of holding equity for the long term. In this article, we discuss how to achieve your life goals and yet derive the long-term benefits of equity investments.

Go-to portfolio

Suppose you pursue Goal 1 for 6 years and Goal 2 for 8 years. You will typically invest in a 6-year bank recurring deposit (RD) and an exchange-traded fund (ETF) for Goal 1. Similarly, you will invest in an 8-year RD and a different ETF for Goal 2. Your bond and equity investments are, thus, earmarked for each goal. What if your equity investments decline in the fourth year of Goal 1? You will have limited time to recover your losses. Yet, you must sell the ETF in year 6 to meet your goal. You do not give your equity investments enough time to recover losses and accumulate wealth.

What if you delineate your equity investments from your goal-based investments? That is, you have one equity ETF to meet all life goals. You can still use this equity investment to fund Goal 1 if returns are positive. But what if you suffer significant losses on the ETF in the years closer to the end of the time horizon for a life goal?

You could use bond investments earmarked for goals with longer horizon that are less important than the current goal. Suppose your goal is to currently meet the down payment for a house and your ETF cannot be sold because of unrealised losses.

You must not transfer bond investments from your child’s education portfolio that may have a residual time horizon of, say, seven years. This is because your child’s education portfolio has high priority compared with the down-payment-for-the-house portfolio, as the former cannot be postponed in case of an investment-value shortfall.

Typically, retirement portfolio will be your go-to fund to bridge any shortfall in investment value related to intermediate goals; for retirement portfolio has a longer horizon and may be less important than a goal you want to achieve now.

Conclusion

You must continually rebalance your equity investments — take profit when actual returns in any year are greater than expected returns.

This lets your equity investments accumulate gains and yet not risk giving up all the gains should the stock market tank later. The proceeds from rebalancing must be transferred to a fixed deposit and can be used to bridge any shortfall that may arise if equity investments decline in value.

(The author offers training programmes for individuals to manage their personal investments)

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