How investing strategies should change with age
As one closes in towards retirement age, defensive and frontline stocks at reasonable valuations along with dividend yield stocks should be on the platter.
Time is one of the most critical aspects but is least understood in investing. Almost all legendary investors have seen some of their investment ideas fall by more than 50 percent before it recovers and gives them multi-bagger returns. Starting to save early is as important if not more than picking a good investment idea. Investing and financial planning is all about compounding the investment year on year. Thus the more time it gets to play the higher are the returns. However, as saving is not really taught in our educational system most of us do not take up to saving as soon as we get a job.
The important initial years in a person’s life, where he has few commitments and financial responsibilities, are lost in floundering away his money. But saving a part of the income is only a small part of the game; the bigger issue is putting the money to use by investing in the correct instruments. For a long period of time one of the first investing products of Indians was insurance. Though not exactly an investing product, insurance were for long been miss-sold as financial products.
Not only were the initial years lost in not saving but saving in products which do not even beat the rate of inflation, did not solve any meaningful purpose. These initial years would have helped the individual to adopt a completely different investing strategy in later years. Many individuals make similar mistakes throughout their life times. Though they follow a correct saving methodology, their investing strategy is often wrong. When it is time to go aggressive they are cautious and when it is time to tread carefully they adopt an aggressive strategy and end up losing their capital.
There is a general consensus in the investing community that as one approaches close to retirement age one should move from investing in stocks to investing in bonds. However, as modern healthcare has improved, so have life expectancies. A person can continue to live for nearly a couple of decades after their retirement age. This is a long enough period wherein investing in bond or so-called safer products would barely meet inflation rate. The retiree will have to dig in to his capital in case of exigencies or during periods where inflation shoots up.
It is, therefore, important to make equity a part of life-long investment plan. In that case it is important to have an investing style based on your age. Having said that, there is no substitute for value investing or as legendary investor Jim Rogers said, “I just wait until there is money lying in the corner and all I have to do is go over there and pick it up. I do nothing in the meantime.”
This philosophy works best in the midst of a bear market and for those people who has the cool of making a sound decision when the world around them is falling apart.
For a normal investor who is in the middle of a slowly moving secular bull market, there will be years before he could get the opportunities at the ‘throwaway’ prices that a value investor like Jim Rogers talks about. The investor will have to adopt various strategies to join the bull run at the same time ensure that there is enough factor of safety built in.
For an investor who has just taken up a job after college and is starting investing after gathering some knowledge on how to go about it, it would be better to take up some riskier bets. Since time in on his side he can look at companies that are just turning around. A fast moving economy benefits most of the companies. If the company is into losses on account of sectoral issues and not due to mismanagement, then betting on turnaround stories is a safe bet which can give multi-bagger returns over the long run.
As he progresses in life the investor can start looking at growth stories, companies which have been growing rapidly on account of changing macro environment or due to rapid expansion and acquisitions. Growth companies are profitable companies which have a track record and are hence safer than turnaround companies. However, in order to milk the entire run in such companies, investors needs to catch them young at good valuations, before other investors start eyeing them.
As family responsibilities are added on to the individual, risk taking ability decreases, this is generally the right time to look for dividend yield stocks, where there is little risk of capital erosion at the same time a decent tax free yield is ensured by picking up these stocks.
As one closes in towards retirement age, defensive and frontline stocks at reasonable valuations along with dividend yield stocks should be on the platter. Even if the market falls, there are enough cushions for these stocks to come back. Investing is a lifelong process. A true investor never really retires. Even after leaving his day-to-day duties he would continue to either search for new opportunities that the market has to offer, or closely monitor his portfolio built over his lifetime.
But everything starts from saving. One first needs to be a good saver, one who respects and knows the value of money, before he can be a good investor. Regular contributions, which should increase with age and prosperity should provide a very comfortable retirement and leave enough for the next generation too.The writer is executive director of Trade Smart Online