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How to build your portfolio for retirement in current bear market

It becomes important to understand how to build your portfolio for the long term in a bear market if you see equities as a key mechanism, especially for retirement planning. (iStock)Premium
It becomes important to understand how to build your portfolio for the long term in a bear market if you see equities as a key mechanism, especially for retirement planning. (iStock)

  • Last Friday alone, selloffs in the market eroded more than 4.90 lakh crore of investors' wealth. Hesitancy is witnessed among investors and a bullish stance seems impossible at least in the near term.

Currently, bear markets have hovered globally as investors turn to panic selling as worries over global economic slowdown taken rounds after the US Federal Reserve made its third aggressive rate hike to the tune of 75 basis points. Hints for another 125 basis points hike by December 2022 end have spooked markets. Last week, both Sensex and Nifty 50 tumbled by nearly 2% each. Last Friday alone, selloffs in the market eroded more than 4.90 lakh crore of investors' wealth. Hesitancy is witnessed among investors and a bullish stance seems impossible at least in the near term. In such a case, it becomes important to understand how to build your portfolio for the long term if you see equities as a key mechanism, especially for retirement planning. In fact, this bearish tone of markets can be used to build a valuable portfolio for a wealthy future.

Last week, on Friday, Sensex dipped by 1020.80 points or 1.73% to end at 58,098.92. Meanwhile, the Nifty 50 plunged by 302.45 points or 1.72% to close at 17,327.35. Heavyweight stocks were under pressure dragging the markets. Banking stocks were worst hit, while sharp selling pressure was also seen in capital goods, consumer durables, and auto stocks. Selloffs in midcap and small-cap stocks further dampened the performance. Overall, a broad-based bearish tone was recorded.

The market cap of BSE-listed firms ended at 2,76,64,566.79 crore by end of September 23 -- nosediving by 4,90,162.55 crore compared to the previous day. In the last four trading sessions from September 19 to September 23, the market cap fell by 6,77,646.74 crore.

Talking about market performance, Dr. Joseph Thomas, Head of Research, Emkay Wealth Management said, "The equity markets traded lower mainly tracking the developments in overseas markets, especially the US. The Fed rate hike and the stance that rate hikes would continue till inflation is contained displayed in ample measure an aggressive and hawkish Fed. Even if it costs a little bit of economic growth so be it, this has been the stated approach. This time around the Fed policy comes with a projection of lower growth and gradually rising unemployment. This was to the dismay of many a market participant who believes that this is a confirmation of the US gradually entering a period of declining economic growth, a growth that is already slowing. This has affected the equity markets, and this has sent its reverberations across the world. More than anything else, it is the expectations of higher interest rates and lower liquidity that is at the back of the mind of many an investor."

Going forward, Shrikant Chouhan, Head of Equity Research (Retail) at Kotak Securities believes for the domestic market, one of the key near-term events to watch out for is the upcoming RBI monetary policy.

Thomas added, "High inflation, widening trade deficit, weakening currencies, and a likely slowdown in growth may entrap some of the emerging market economies. The policy from the RBI is expected in the next few days, and the anchoring of the policy will be keenly watched to see its implications for the market at a time when the economy is witnessing high credit growth and a shortfall in money market liquidity."

While Vinod Nair, Head of Research at Geojit Financial Services said, "A rise in the US 10-year bond yield and a strong dollar index influenced FIIs to flee emerging markets. A fall in liquidity in the banking system, a weak currency, and a current premium valuation have set the market outlook bearish for the near term. With aggressive monetary policy action by central banks, the global growth engines are in a slowdown mode, whereas India is currently in a better position with a pickup in credit growth and an uptick in tax collection. The current volatility might persist for a while. Investors are advised to wait and watch until the dust settles."

How should you build your portfolio in a bearish market?

Surjitt Singh Arora, Portfolio Manager, PGIM India Portfolio Management Services said, "Given the uncertain environment and slowdown in global growth, CY22 could be a challenging year for the markets. However, from a 3 to 5 year perspective, we remain constructive on Indian Equities given the fact that the Indian Economy would be one of the fastest growing economies in the world."

The Portfolio Manager pointed out a few important principles one should keep in mind when it comes to managing money. These are:

Spend less than you earn

The only way you can be successful is by having more income than expenses every month. By spending less than you earn, you can put money away for the future instead of living pay check to pay check.

Invest in Equities for the long-term

Compounding is the 8th wonder of the world. One who understands it, gains from it. As a thumb rule, 100- one’s age = % of Equity investments; i.e. if a person is 30 years old, ideally he should have 70% of his / her investment in Equities (preferably diversified Equity Funds). One should invest for a minimum 10 years to reap the benefits of Compounding. “Time in the market is more important than timing the market.

Planning for retirement

As per thumb rules, the retirement corpus should be 30 times annual expenses in the year of retirement. For e.g., if inflation is 5% and you use the rule of 72 as a thumb rule, then 72/5 would mean 14.4 years or around 15 years. This means an amount at 5% inflation will double in that much time. In other words, an annual expense of 3 lakh will double to 6 lakh in 15 years and double again to 12 lakhs in 30 years. So, a person at 30 retiring at 60 would have his current annual expense of 3 lakh become 12 lakh. He would need 30 times of his living expense - so his retirement corpus should be around 3.6 crore.

 

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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