Why You are Not an Average Investor

Using a model portfolio or age-based asset allocation can be considered a good starting point, but do remember there is no one-size-fits-all when it comes to your financial planning.

Amy Arnott is a portfolio strategist for Morningstar. Amy advises readers to tailor their respective portfolios to a better fit for financial planning.

Here are some of the cases listed by Amy where a standard asset allocation doesn’t fit all. So, in this article we will take three such situations from her cases which are edited to an Indian context for better understanding:

  • You have a big chunk of your wealth in company stock: This thing will impact a little but you must pay heed towards it. Investors who suffered 7-figure losses when their employer’s stock turned south then the emotional and financial impact can be devastating. To avoid such losses, it is always wise to prune back your stock holdings so that they make up less than 10% of your total portfolio. As it is mentioned earlier, you should not have any fixed allocation, it is better to view it relative to your overall net worth.
  • Your life span is shorter than expected: You may be unlucky to have a serious health problem that can make your life shorter than expected. So, if you are dealing with some terminal illness, then you must have a host of issues to take care of. One of the prime importance should be about your portfolio. Your portfolio should be conservative enough to meet the higher-than-expected healthcare expenses. You should never feel guilty about spending down your assets if you encounter yourself in a situation where you need to.
  • You do not have sufficient assets to last through your lifetime: This can be frightening and very real. If you are approaching retirement, but you were not able to save and invest much in your early career, your portfolio balance might be relatively low. You need to make a hard decision about your spending. Look at the ways to cut down your normal day-to-day expenses. Keep in mind, it almost never makes sense to keep 100% of your assets in fixed-income securities and cash, even if your financial picture is a little dire. Thanks to the lower co-relations between fixed-income securities and equities, adding a 25% stake in equities can help greatly reduce volatility for a fixed-income-focused portfolio.

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