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Reached your financial goal early? Avoid greed for more returns, move to safer investments

If the money goal is less than three years away, redeem from equities and reinvest the amount in debt instruments with lower risks and stable returns

November 18, 2021 / 10:44 AM IST

People like me keep talking about investing ‘more’ to reach our goal targets on time. But what if your investments do a little ‘too well’ and you reach the target corpus years before you actually need the money?

That’s a good problem to have and most people would love to be worried about such things.

An elder friend had a financial goal to save Rs 40 lakh for his daughter’s graduation by 2024. Thanks to the equity rally in the last one year, his portfolio is at Rs 43 lakh with 63 percent equity and 37 percent debt. He has already (over)achieved his target!

As any sane person who understands what havoc a bad sequence of returns can wreak, I asked him to exit/reduce equity. More so because the portfolio is already sufficiently large and there is no mathematical need to take unnecessary risks for high returns.

But he doesn’t want to reduce equity now. In his own words, he is a bit greedy. I am fine with it as I can only suggest and it is his money after all. This is a problem that many people face.

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Reaching your target ahead of time

My view is simple here. We need to aim for optimum returns and not run after return maximization. Focusing on the latter leads to unnecessary manoeuvres that expose the portfolio to risks that are not worth taking. So, once the target goal amount is achieved, you should be prudent and cut down risks.

Taking my friend’s example further, here is what could be done:

-He had a target of Rs 40 lakh for 2024. He has Rs 43 lakh in 2021.

-The first thing to do is to reassess the goal target value closer to the goal deadline. Is Rs 40 lakh still a good enough number? Or is it an old target that was calculated several years before without giving it another thought? A lot of things can change in a few years’ time.

-If he hadn’t re-assessed the target, it’s a good time to review that to see whether it still stands given the current cost and inflation trends.

-Assuming that the target is still ok, what should be done?

-Since the goal is critical enough, there is no real point in taking unnecessary risks. If the time remaining is three years or less, then it’s best to redeem the amount and reinvest in instruments with lower risks and stable returns. Money growing at a lower rate is fine, as we have already achieved the target and we have the option of meeting our goal without exposing the accumulated capital to any further risk.

-Of course, you may counter this with the argument that education goals are spread over 3-4 years. So, while my friend’s goal begins in 2024, the fund requirement is spread over 2024 to 2028. The amount required for the last few years’ fee is still like a medium-term goal and not a short-term goal like the first two years’ fee.

-If you still want to optimize for the above logic, then you can reduce equity to a smaller component (say 15-30 percent) and keep a majority of the money in less-risky debt instruments. It will give you peace of mind that a major chunk of the goal is secured and a part is still trying to earn more (if you really want to do that).

-Whether you withdraw the full amount and move to debt, or keep a part in equity will also depend on your risk appetite as an investor. Different people have different views here.

Goal horizons change

After a few years, all long-term goals become medium-term goals. And again, after a few years, these become short-term goals. So your asset allocation should also change as per the remaining investment horizon. Also, different goals demand different asset allocation.

 In general, when you have achieved the target value of your financial goal before time, it’s best to book your gains and protect them. No one can correctly time the markets and catch the highs or lows perfectly. So it’s essential to have a goal-based outlook towards investments and stick to your targets. And if the target return or goal is achieved early, take your gains and de-risk your portfolio.

Also read: De-risk your Retirement Portfolio when nearing retirement.

Staying invested in equity after reaching your goal targets can be risky. You may have to be a bit flexible depending on your circumstances and market events, but still, it’s better to secure gains when your portfolio is linked for critical goals.
Dev Ashish The writer is the founder of StableInvestor.com
first published: Nov 18, 2021 10:44 am

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