Fear or panic selling is a key hurdle in your wealth creation post retirement

One of the worries in our mature phase of life is whether we will have enough funds post retirement from our chosen field of work. This is a valid concern. It requires a well-studied, systematic and patient approach. These elements are the cornerstone of long-term investing. But not many people possess or cultivate these elements in themselves.

Every time the stock market climbs a new peak the murmur of a big fall spreads. Investors start talking about a possible fall. These include primarily those who have not fully participated in the bull market fearing a stock market crash. This fear of a fall in equity markets has made investors stay away from stocks and mutual fund schemes investing in stocks. This fear of losing your investments in equities is a big hurdle in your goal to create a sizeable corpus for yourself post retirement.

Let us address this hurdle of fear by understanding in a nuanced manner certain important factors you need to be aware of while investing in equities:

One of the first principles of personal finance is: do not put all your eggs in one basket. Diversification holds the key for most investors especially those who are not full-time into investment business. If you are preparing to fund your retirement, then it makes sense to allocate across asset classes – bonds, stocks and precious metals to begin with. In such cases, not all asset classes go down or up together. Even if the stock markets tank in a particular year when you are close to retirement, you may keep aside your equity portfolio and fund your requirements like paying off loans or meeting regular expenses using the debt component of your investment portfolio. Over a period of time, when interest in equities revive, you can use the returns generated by your equity investments to fund your needs in golden years.

A key factor you must bear in mind while investing in equities with the long-term vision of funding your retirement is asset allocation approach. When you start preparing for retirement, you are young and have a long time on hand. During this period, it makes a lot of sense to allocate more to stocks or equity funds. However, as you grow older, allocation to equity mutual funds should go down. Naturally, as you near the age of superannuation you would see your allocation to equity mutual funds going down gradually. This can save peace of mind for many individuals. In this way, you protect the downside of your investment portfolio from the negative impact of volatility in the equity markets.

But you cannot avoid volatility in the markets. The best way to deal with volatility is to accept that volatility is the second nature of equities. One is the short-term volatility. Perhaps, delving into the historical data will help explain why short-term volatility is also an opportunity in disguise. Years such as 1992, 2001, 2008 and 2020 are remembered for big falls in the markets. Also almost each year, stock markets show phases of volatility. They may last a few days or a few months. These can be 10-20% falls. Despite all these volatile phases, the Nifty TRI has multiplied investors’ money 16 times in the past 20 years, ending November 30, 2023. So, the key point investors should keep in mind is that the volatility in the short term puts a savvy investor at an advantage over others who panic. It gives an opportunity to investors to buy good businesses at a right price. And if they remain invested for long periods, then their wealth grows.

Another important data point most investors forget is that the volatility does not hurt much in the long-term. According to an analysis, in the past two decades, if we consider rolling returns, there were 24% observations in which investors lost money over one year. In the case when investors held their investments for three-year period, their chances of losing money dropped to 7%. And if investors held their investments for a minimum seven years, they did not lose money at all. Instead, the analysis shows that investors made at least 5% returns.

So to put it straight, investors lose only when they panic and sell. They tend to make money when they invest in a panic situation in the markets. So, the best way to fund retirement goals is to initiate Systematic Investment Plans (SIPs) into diversified equity funds – Flexi-cap and Multi-cap funds. You should keep increasing the SIP amount each year. Importantly, whenever there is a bearish phase in the markets, you should make lumpsum investments.

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Disclaimer: This report is prepared in his personal capacity and neither the Author nor Money Honey Financial Services Pvt Ltd assumes any responsibility or liability for any error or omission in the content of the article. Investments in mutual funds and other risky assets are subject to market risks. Please seek advice from an investment professional before investing.

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