Thursday, 16 July 2015

Having a Good Discussion is Like Having Riches

Having a Good Discussion, is like Having Riches; so goes an African proverb attributed to Kenya. Thanks for the richness of discussion around my post titled A4 Portfolio on the FB page ASAN IDEAS for WEALTH. The fastest way to learn is to engage with other practitioners of the subject matter. I looked through the multitude of notes and comments and decided to respond in a Q & A format. This allows me to capture all the thoughts in one place, and also provides some continuum to the different perspectives shared by readers.

I have stuck with the content which was directly relevant to the topic of discussion.  Feel free to join in the conversation, by adding your thoughts.

There are a couple of such stories in my blog. Both are members here. There is one more person here and one person who lost his FB acct. All are early retirees

Yes, thanks.  I have reviewed the stories and they are certainly inspiring.  Like any good academician would agree, one of the first steps before embarking on a risky project is to review prior art.  I will definitely try to touch base with these pioneers to get specific feedback on my plans

Have you stress tested your portfolio? I think it is too aggressive. The early retiree portfolio I know have max, 50-40% equity which is a pretty decent exposure. They decide equity exposure based on how long they can live comfortably with the debt component alone. At such high levels of equity, a poor sequence of returns could prove detrimental.

Good inputs. First off I must clarify that the A4 Portfolio I describe is my current asset allocation during my accumulation phase only.  Once I have accumulated a sufficient corpus, I will adjust my retirement portfolio as described in 50+ Year Retirement Map.  The plan during retirement (as described in the post) is to have 10 years worth of living expenses in debt.  I am hoping that will provide the necessary buffer to survive long stretches of under-performance in the equity markets. Would you agree?

Sharing the plan on AIFW is one way to qualitatively stress test my plans, since it gives me access to constructive feedback that I can mull over, and react to as needed.  My accumulation A4 Portfolio has been stress tested for several years now, since I have been following a full throttle EQUITY based investment approach! Naturally volatility has been high, which is reflected in some of the posts I have written over the years.  At the end of 2013 I wrote about the Six Sideways Years, when the SENSEX essentially stayed flat. Was tough staring at my portfolio through those years, and you can sense that in the tone of the write-up. On the other hand 2014 was phenomenal resulting in the upbeat vibe in Multiply Networth 6X in 6 Years.  

The retirement plan for my portfolio is discussed in 50+ Year Retirement Map.  The equity component there is a slightly more sedate 70%, which is better than what I have currently in my A4 Portfolio at almost 80%, but still more aggressive than the 40-50% you have quoted.  I have chosen to keep 10 years worth of expenses in debt, and the rest in equity, will that work?  The hope is that the 10 years of debt will provide the necessary buffer against sequence of returns risk.

I am interested in FI as well. By early how early do you mean? Is it 5 years, 10 years? How much are you saving and investing? 50%, 75% of income?Do you intend to follow the ERE principles?

Aah, this is the tough one to answer!! Here is a post I had written in Feb2015 where I penned my thoughts on What is Early Retirement?  Thought provoking at best, and ultra controversial at worst!

ERE is a fascinating experiment challenging the established norm.  I say experiment, because the perpetrator Jacob eventually went back to a regular job, though he maintains it was more out of boredom.  Oct2011 is when I first wrote about Jacob Lund Fisker, followed by Feb2012 where I discussed his low annual sustenance needs in Early Retirement in India : Extreme Style.  There is a thing or two you can learn from his overall approach, but I think it is a little too frugal and extreme for my liking.

ERE will not exactly work in India considering the assumptions made. From what I see from my nos, it is possible with 15Y with a bit of luck and aggressive investing. Percentages dont matter

Agree.  ERE as described by Jacob will not work in the Indian context.

Agree. 15 years of a working career is probably the absolute minimum required to make FI happen unless you make windfall gains.

Disagree.  Percentage of overall income savings will make a difference, particularly in the early years when your corpus growth is powered more by your inflows. In later years as you approach FI, the rate of investment return dominates, and you can relax on your savings rate.

Would be interesting then to see how much time OP has decided on then

I have been targeting the 15 year mark, but will probably land up nearer to 20.

I do not think leading a frugal life between 30 and 45 will be worth retiring early !! My thoughts are you somehow need to balance both if you can. If not then focus on living well ( not spending recklessly) and retire like most people do, Many of the costs are really outside our control and as your family grows lifestyle creep is an inevitable consequence. When I started working 27 years earlier, I would have been happy with a Maruti 800 but that changed real quick once I got married. 3 cars later I am quite firm that I am buying no more but then who knows?

Well written! There is definitely truth in the opinion listed above. There are several things that can only be done when one is younger, and it would be foolish to expect you can do them later in life. The present versus future trade-off is a tough one to navigate, and is a very personal choice that differs widely from person to person.

Investing wisely for 20 years can get you there. Of course if you have 2 children and need to fund expensive private school and college education this can go awry very quickly.

Agreed! In the Indian context Inflation, Health Care and Education, in that order, are what worry me the most. You can see that in the structure of my 50+ Year Retirement Portfolio

I am one of the Financially independent persons referred to in his comment. I currently run a strategic consultancy practice for IT and ITES companies but am not dependent on that income. You may want to read my blog at where I have discussed several issues on Financial independence and other stuff.

Yes thanks, I will certainly touch base with you to learn from your early retirement experience

I find an issue with your Asset Class allocation list. Mutual Funds is listed as an asset class. This is incorrect. Mutual Funds is an investment vehicle. Equity is an asset class. Investments in mutual funds must be split showing the value and percentage invested in equities and debt/income. This break up will indicate the true risk in your portfolio.

Thanks for the inputs. I reproduced my NSDL CAS statement allocation picture, since it is a common reference that most of us can use. The classes shown are simply the ones the NSDL statement provides! I agree that MFs include both equity and debt.  Upon closer scrutiny you will see that I explicitly call out "One drawback here is that the distribution above, lumps all MF investments into one category, whether they are equity oriented, hybrid, balanced, debt etc"  I also provide my allocation across asset classes as follows "So to summarize, taking into the account the PPF/EPF components that are missing from the allocation above, I have upwards of 75-80% allocation into EQUITY (the bulk in MFs, with some exposure to direct equities) About 10% in DEBT, and 10% in REAL ESTATE"  So the "true risk" in my portfolio is the fact that I have upwards of 80% allocation to equity at this time (which has been pointed out by other readers)  Do you agree?

By the way, perfios does a nice break-up of the portflio view - the default one is based on vehicles, but there is an asset class view, The view for me keeps reminding me of the mistakes I made in increasing real estate at the expense of equity

Yes, thanks.  Perfios is definitely a lot nicer in terms of its representation.  I chose to share the NSDL CAS view since (1) all of us will/should have it (2) and for cases where the bulk of your investment universe is in financial instruments (and PPF/EPF/FDs/RDs are relatively small components) it is a fairly accurate representation.  Both of these are true for my particular case.  I guess Perfios will also have more powerful drill down features, that help you analyze the allocation in more detail within a specific asset class.  NSDL CAS is certainly simplistic in comparison.

Bro you did not reply your time to achieve early retirement?

Thanks for the active interest!  Hopefully I have covered it here in this post.

Please keep the thoughts coming. I certainly value the differing perspectives, and suggestions coming through as a result of this conversation.


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