Retiring investor in India might often get prompt to adopt Warren Buffett’s investing strategy of aggressive risk tolerance on the face value of earning higher returns.
As highlighted in his 2013 letter to Berkshire Hathaway shareholders about his 90/10 strategy with 90 percent allocation going into equity and remaining 10 percent in bond.
It significantly paid off over a longer period with stocks earning about 60 percent returns in comparison to 8 percent by bonds on the overall portfolio.
The basic fundamental that he intended to cover in his letter revolved around retirement strategy with asset allocation overweighing on equities and overlooking on the emotion among other takeaways.
However, adopting this kind strategy comes with a deep understanding of the market and anticipating the future outlook. A suitability of 90/10 retirement strategy is further subjected to a willingness to withstand in bear phase and duration between now and retirement period.
This challenge opposes a setback for the strategy to play out as the majority of retiree investor seek to churn the portfolio during the market turmoil and hug losses. But, what if someone stayed invested in similar strategy?
Let’s assume a static asset allocation of 90/10 invested in Nifty (90%) and 10-Year Gsec bond (10%) during 1st January 2008 with a corpus of Rs10 lakhs.
Taking December 2017 as an end period where 10-years average rate of returns for Nifty stood at 10.42 percent and 10-year Gsec bond was trading at 7.77 percent (YTM), which means that as on December 2017 the value of the portfolio stood at Rs. 26,36,475.
But, for a reverse asset mix with 90 percent allocation towards bonds and remaining 10 percent into equity, the value of the portfolio stands lesser by Rs. 4,64,165 which is a significant difference despite considering average returns.
Further, across this period there has been a major turmoil in market losing about 51.84 percent post-financial crisis followed by fall in 2011 by 24.9 percent and thus hurting the portfolio.
Yet, over a year it managed to recoup its losses and offer considerable corpus without altering any strategy. But, the fact that this strategy succeeded for Warren Buffett or for Indian investor, doesn’t mean it will replicate similar performance in future.
Unless if it’s meant for longer duration and commitment to stay invested irrespective of market direction, this strategy doesn’t hold true for an investor with limited time horizon or for risk-averse investors.
Disclaimer: The author is Founder & CEO, 5nance.com. The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.moneycontrol