Diversifying Portfolio for a Secure Retirement example of Investing in Multiple Assets

Assumptions

It may be argued that certain points were overlooked in the estimation of the post-retirement corpus, but this is beneficial in our current situation as it helps to calculate the retirement corpus conservatively.

The idea is to understand personal finance so that we can finally get the total number correct.

In the earlier chapter, we deduced that we need roughly 7Cr by retirement. This chapter addresses the strategy to generate the desired financial corpus before reaching retirement age. It should be apparent to you now that investing today is imperative to attain our goal of having the retirement portfolio ready by the pre-delineated year.

By diversifying our investments across multiple assets, we create a multi-asset portfolio – consisting of fixed deposits, gold, real estate, equities, cash, among others. Through this technique, we can achieve overall growth that is the aggregate of all these assets.

To gain further insight, let’s consider that your total wealth is divided across different holdings.

– 50% of your total wealth is invested in real estate

– 10% in a fixed deposit

– Around 10% in gold

– 15% of your entire capital is invested in stocks.

– Cash accounts for 15% of all payments.

The numbers we’ve chosen are just an example.

The growth rate for each of these assets varies, so it is worth considering the overall growth when compiling a portfolio. What will the total impact be?

To answer this, we need to determine the anticipated growth rate of each of these assets.

I anticipate a 10-year Compound Annual Growth Rate (CAGR) from these assets as follows:

– Real estate – 8-10%

– Fixed Deposit – 6-7%

– Gold – 8-9%

– Equities – 10-11%

– Cash may not seem like the best investment, given that it typically does not appreciate in value, and when adjusted for inflation, it actually decreases.

You can form an opinion about these assets’ growth potential by looking at historic trends and considering their future performance. As a word of caution, whenever you make predictions/projections in personal finance, it’s best to keep the figures on the conservative side.

Essentially, I’m aware that equities can perform much better than an 11% CAGR over a long period of time, so I’ll use that as the benchmark. That way, I can craft expectations that are fairly conservative, with anything above and beyond that being a welcome surprise.

The accumulated portfolio value can be calculated by considering the weight of each asset and its expected return.

= (50% * 10% + 10% * 7% + 10% * 9% + 15% * 11% + 15% * 0) * 100

= 8.25%

Comparing the diversified portfolio of multiple assets yields an overall return of 8.25%.

Certainly, the way assets are allocated can influence portfolio performance. We have previously discussed this matter at length, so won’t go over it again now.

It’s interesting to see how people typically divide their net worth among different investments. Have a look here to find out.

The infographic above focuses primarily on the HNI and above class; but if you visit an average financial planning company, you can expect to receive a plan with a similar diversification strategy.

Multi-asset portfolios are highly desirable, and we could delve into the details, however it is more complex than what has been discussed so far in this module. Therefore, we will leave this for now.

To solve the retirement problem, we will consider only equity investments, specifically systematic investments in a growth-oriented mutual fund.

If you are not familiar with ‘systematic investments in a growth-oriented equity mutual fund’, no need to fret. This will be given thorough attention in the following part of this module.

We must take into account equity in our retirement problem and apply an estimated growth rate. I believe a CAGR of 10-11% is a sensible expectation considering the timeframe, which is more than ten years.

Therefore, let us go with this figure for the present.