Warren Buffett has suggested as to how his wife’s money to be managed after he’s gone.
“My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in an equity fund. I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who invest anywhere else.”
If you remember, I wrote a piece two months ago on how equity is essential not only in accumulation phase but also during distribution phase. I suggested that if someone is 50 years old with a life expectancy of 80 years; 3 years worth of expenses should be kept in liquid fund and the balance (27 years) in equity funds. What I’ve suggested is nothing but 90:10 (Equity: Debt) asset allocation.
I’m not saying that this is for all. I would recommend this only for people who can put up with greater volatility and temporary erosion of capital. The benefit would be wealth creation despite withdrawals and ability to pass on wealth to next generation after having a comfortable retirement.
I came across an article which cites that based on the research done for last 115 years (1900 to 2014); this strategy is simple and sound and has performed very well.
It also suggests the following:
“When stocks do well, retirees should take the annual withdrawal from stocks and rebalance the rest of the portfolio back to the 90/10 allocation, the paper said. On the other hand, when bonds outperform, retirees should withdraw from bonds but not rebalance the portfolio.
These changes could provide higher upside potential and better downside protection.”
We’ve written in the past as to how positive years are lot more than negative years for the markets.
For the period 1926 to 2014, US stocks (S&P 500) was positive for 73% of the years.
During close to last 4 decades, Sensex has been positive for 70% of the years.
Over decades, markets only keep trending upwards and the possibility of loss stands greatly reduced. As I’ve mentioned before, the CRISL AMFI Equity fund index has never given a negative return for any 5 year period on a daily rolling basis since inception.
You can chose your asset allocation (Equity: Debt) as 60: 40, 70:30, 80:20 or 90:10.
That is based on your comfort, time horizon, size of corpus and few other factors.
However it is a myth that a retirement portfolio has to be very conservative. To lead a comfortable retirement, not to outlive the money and to pass on good wealth for next generation; choose a minimum of 80% and a maximum of 90% in Equity.