How Much Should I Invest in Equities?
“How much should I invest in Fixed Deposits (FDs), Stocks, Gold & Real estate?” We encounter this elementary question almost daily while interacting with several salaried and self-employed individuals. Well, if this question has haunted you at some point of time or even worse, if you’ve never thought about your investments in this fashion, then it’s time for you to take charge and read on. In case you are not convinced about investing in equities for various reasons, read this – Why Should You Invest in Equities? However, in this post, we shall only address the question of how much should one invest in equities.
100 Minus Your Age Rule
The most common thumb rule says that subtract your age from 100, and the result is the portion of your savings that should be allocated to equities. Eg: For someone who’s 30 years old, he must invest 100-30 = 70% of his savings in equities. This is what we call OVER-SIMPLIFICATION of a problem.
GreenEdge Wealth Services’ View
According to the above rule, a 60 year old gentleman who is a High NetWorth Individual (HNI), who doesn’t have any dependents, no liabilities and earns regular income from his business/ interest on FDs, which sustains his lifestyle comfortably, should only invest 40% of his savings in stocks even though he has the inclination and risk appetite to invest more than 40% in stocks. Clearly, this rule does not hold true for several such instances across age-groups.
So, how do you arrive at a number? Unfortunately, there is no easy quick-fix mathematical formula to arrive at the answer. There are 2 aspects to this – ‘Ability to take Risk’ & ‘Willingness to take Risk’. The former can be reasonable assessed through certain scientific ways but the latter depends on a person’s psychological beliefs.A simple risk profiling exercise will help you to assess the quantum of investments in debt, equity, gold, etc. You should approach your investment advisor to facilitate the risk profiling exercise for you.
What Should You Do?
So, in our view, first, build a safety net by investing in fixed income instruments, by buying life and health insurance. The remaining surplus savings which one may not require for regular expenses over 3-5 years can be invested in equities subject to your risk profile. We would like to reiterate that investing in equities can prove to be extremely rewarding over long time horizons.
Peter Lynch, the ace investor, sums it up in the best way – “Only invest that in equities, what you can afford to lose without that loss having any effect on your daily life in the foreseeable future”.
Also, don’t forget – “The best time to invest was yesterday, the second best is today.”
Feel free to write to us on [email protected] to know how much should you allocate to stocks.
You can also read Why Should You Invest in Stocks?
Disclaimer – Each individual should determine one’s asset allocation basis his/ her risk profile.