The passage to an efficient retirement plan must bypass the barricades set up by fear and apprehension—the two emotional constraints that constantly plague most ordinary mortals.
The average individual, often hesitant to take decisions, feels trapped within extreme feelings that prevent him from investing in the right retirement product at the right time. This frequently results in an under-performing portfolio.
The fear of testing the waters, compounded by apprehensions about investment options, stops investors from trying new strategies or overhauling their asset mix.
Faulty planning, often a result of conservative approaches or reckless allocations, results in a weak asset mix, leaving a trail of unanswered queries on the portfolio’s performance.
Remove fear and apprehension, and many of these questions will be answered. What is the investor’s risk profile? What should be the most optimal asset allocation? How will the most appropriate investment products be chosen? Which factors are likely to pose risks? These queries, which are major considerations for a financial planner, must be addressed before the products are purchased.
A fearful and apprehensive individual must grasp two tenets in the early days. One, each allocation, whether insurance, mutual fund, bond or commodity, must be fully justified, drawn from personal circumstances. The reference here is to the hallowed principles of ‘life stage planning’, among others. Two, mistakes made in the past, if any, must be taken off the slate to accommodate a new beginning.
Let us, for clarification, dwell more on the second point. Many investors have distressed elements in their portfolios, which have been retained despite losing relevance.
Such holdings include stocks purchased during their initial public offerings (IPOs) that have consistently under-performed, or funds that have given single-digit returns for a while, or pointless insurance products, despite their heavy premium.
In sum, such elements do great disservice to the investor—a drag on the retiree’s overall returns.
Far too many plans are blunted by their presence, despite decades of saving and investing. Hardworking individuals often do not realise that their net gains (after accounting for inflation, and income tax) remained low for long periods.
What should be done to contain the impact of the two conjoined enemies? Adherence to a few simple principles will set the tone for a well-oiled retirement plan.
First, all investment products must have a direct bearing on risk-return parameters. This means that an endowment product should not be considered if their inclusion holds no relevance. Instead, the investor could weigh a term plan, or desist a sectoral fund, or focus on a diversified fund. He must know that wrong preferences won’t serve his purpose.
Second, long, unplanned interruptions are best avoided. This refers to investment plans that must be ideally conducted for long periods. Systematic investment plans (SIPs) in mutual funds, for instance, will likely suffer in the contest of unplanned gaps. Terminations, if any, must be planned too. Those who have taken such extreme steps without ample reason later regretted their decisions.
Third, all the elements in a portfolio must stand the test of costs and expenses. In other words, a retirement-minded individual must realise how much he is bearing by way of costs levied by sundry intermediaries—fund managers, insurers, securities brokers, etc. Transaction costs are a subject of debate in capital markets worldwide, and investors in India must grasp what our regulators have observed.
The investor must also have access to right advisors, who play a positive role in product selection, transaction, and miscellaneous services. In this day and age, when financial resources are at times abundant, but time is almost perpetually in short supply, intermediaries will hold the key to success. Those who wish to implement a smart retirement plan must seek the services of responsible advisors, who provide optimum, ethical, and cost-effective services.
Lastly, investing for retirement is not as tough as it is often considered. There is nothing to be fearful of, or apprehensive about. An efficient plan will bring its own rewards, and more often than not, the individual retiree will begin to appreciate the right decisions he took in his younger days.
The author is Director, Wishlist Capital