Retiring when markets are on a roll? Here’s how to deal with your stock portfolio

Is your retirement nearing or are you one of those who have retired recently with a decent amount of equities in your portfolio even as the stock markets reached new highs recently?

The question that would be bothering you what you should do with your stock portfolio as these are high risk investments. May retirees in earlier years have run into deep trouble with their stock portfolio when markets had fallen around the time when they retired, such as during the global financial crisis of 2008.

Retirement is a period when people should turn risk averse with their investments, especially with stocks. So what should you do if you are caught in such a dilemma? Financial advisors say that the most preferred investment during retirement years are less risky avenues such as debt funds and fixed income securities.

“Generally, a retiree has a conservative risk appetite if he/she is dependent on the investment to generate regular cash flows for him. In such cases, the primary objective is capital protection and income generation. Equities are a high risk asset class and do not fit in this criteria,” Rahul Parikh, CEO, Bajaj Capital told Moneycontrol.

Parikh makes an exception for people who have a different objective with their stock portfolio. “Some retirees may have other objectives too, like leaving some part of the investment as a legacy or gift to their children or grandchildren. The investment horizon is such case can be long and risk appetite can be moderate to aggressive. So in the first case, the retiree shouldn’t have any exposure to equities. In the second case, even a substantial equity allocation can be maintained, if the investment horizon is long enough (7 years or more) and risk appetite is moderate or aggressive,” he said.

Parikh says the best approach given the current market a shift to debt funds may be advisable. “The markets surely look expensive and in near future, the returns are likely to be low and risk (volatility) high. Hence, if the goal is capital protection and regular cash flow generation, then a retiree should keep bulk of the portfolio in debt funds. However, if the goal has a longer investment horizon (3 years or more) and doesn’t need to generate regular cash flows, the investment can be made in Dynamic Asset Allocation strategies (pure equity strategies need to be exited or reduced accordingly),” he said.

Amar Pandit, Founder of HappynessFactory.in, feels for retirees the recent rally in stocks can be used to book profit and look for safer alternatives. “Direct stocks exposure should be avoided, especially by retirees, because for them portfolio stability is top important. Equity should be a part of the portfolio to meet asset allocation; but this should be through equity funds. The current rally is a good opportunity to book profit in stocks,” he said.

Pandit also advises adopting a proper asset allocation with a bias toward debt. “A retiree should rebalance portfolio. Rebalancing is all about maintaining the ideal asset allocation, which depends upon the person’s risk tolerance and pay out needs. For a retiree the focus is more on safety of the accumulated corpus and making sure it can beat inflation. This can be achieved through proper asset allocation and a healthy diversification with equity, debt and liquid mutual funds. What instruments to avoid is most important here – pension plans, annuities & FDs, as they can never beat inflation,” he said.