The most important decision any millennial has to make every month is to deliberate on an investment strategy. Given the knowledge of personal finance is extremely limited, a COVID era investment strategy becomes immensely important.
Investing philosophy post COVID
Equity markets are meant to drive inflation-beating long-term gains over 5 to 7 years. However, the definition of the long term for equity instruments has changed to 10 to 12 years for driving inflation-beating long term gains. Over the next few years, the upside for equity markets remains muted with current expensive valuations, uncertain economic prospects and muted GDP growth for the next 2 to 3 years.
With millennials no longer pursuing three-decade linear careers and opting for multiple non-linear careers, the notion of millennials taking a heavy risk (and investing 100-age per cent in equity instruments) is being heavily challenged. Besides, investing only if you understand the instrument completely (e.g., avoiding financial derivatives, bitcoins) makes tremendous sense in the current context.
Most millennials are likely to start on their own or change careers regularly or pursue creative arts or take sabbaticals, driving an investment philosophy towards capital preservation, low-risk growth with sensible diversification.
The ideal portfolio allocation statement for a millennial includes avoiding common lifestyle mistakes and driving capital preservation with sensible diversification.
It is a common question every millennial has on how to save their monthly income in a post COVID era. The ideal portfolio allocation statement for a millennial focuses on avoiding lifestyle financial mistakes and saving across instruments that promote capital preservation with sensible diversification.
The biggest lifestyle mistake a millennial can make is to live on credit card debt. Not only is it expensive (24 per cent annual interest charge), but it creates a vicious cycle of perennially spending on borrowed money. Also, millennials should strive to save at least 50 per cent of their monthly income and then living and spending off the rest. With a consistent 50 per cent of income saved every month and compounded regularly, a sizeable corpus will be created in a few years. In addition, every millennial should park aside Rs 1.5 to 2 lakh in an emergency fund for the unforeseen (e.g., medical expenses for the family, job furloughs). This emergency fund can be deployed in a bank fixed deposit or a short-term money market debt fund. Medical insurance for dependent family members should be carefully looked into.
Given the risk and unpredictability associated with millennial careers, millennials can look to preserve capital and minimise risk by investing at least 60 per cent of their portfolio in quality debt instruments. This can be split between risk-free instruments like Provident Fund (PF), Public Provident Fund (PPF), Voluntary Provident Fund (VPF), Kisan Vikas Patra (KVP), bank Fixed Deposits (FD), and quality debt instruments like mutual funds investing in corporate AAA and PSU bank bonds.
For the more adventurous, the remaining 20 to 30 per cent of the portfolio can be invested in quality equity instruments. This can be split between passive large-cap mutual funds and mutual funds investing in the American stock markets. The remaining 5 to 10 per cent of the portfolio can be invested in gold, via gold mutual funds or sovereign gold bonds, to drive sensible diversification. At any cost, no investment should be made in volatile instruments like bitcoins, financial derivatives, P2P lending platforms, small-cap mutual funds, penny stocks,
In conclusion, the single biggest decision a millennial makes daily is to decide on a portfolio allocation statement. With the uncertainty around incomes and careers, capital preservation with sensible diversification is the most important imperative. The suggested portfolio allocation will go a long way in ensuring that most millennials sleep well at night.
The author has recently penned the book – Hacks for Life and Career: A Millennial’s Guide to Making it Big