The current state of the markets will have all kinds of investors worried as the cuts to their portfolios have been rather brutal. It also does not look like abating soon as the conditions both global and local, do not present a pretty picture for the next 2-3 months. The investors who are the worst affected are, of course, people who were hoping to redeem from their equity portfolio in this year or the next 2 years.
OK so let us assume you are in a situation where you had pretty much achieved your target figure for a goal like your child’s college education by end 2015. Based on your financial planner’s recommendation you had thought of shifting some amount from equity to debt over the next 3 months or so. This would have ensured that the amount would be largely safe and available when the goal came around in 2017 or 2018. But as they say, “man proposes God disposes”, and in the case of investors the market certainly did not let your plan come to fruition. So what is to be done now?
Let us make the example a little more specific, so that all of us can understand it better. Assume that the money was planned for an Engineering college starting July 2017. You had planned for 20 lacs overall and your portfolio had reached close to that level by 2015 October. Thereafter things went really wrong and you are now having only 13 lacs in your portfolio with more downside quite a possibility. In order to tackle this situation, you will first need to understand the cash flows in question and then look at possible strategies.
The cash flows then – even though the course fees and associated expenses may cost 20 lacs over 4 years, you do not need to have this cash at one go. This is something very fundamental but most people do not understand it. Breaking down the cash flow by semester and assuming there is a 10 % cost escalation every year ( take 15 % if it is BITS ), the cash outflow plan that you need to manage will look like this:-
- 2.5 lacs in July and December 2017.
- 2.75 lacs in July and December 2018
- 3 lacs in July and December 2019
- 3.3 lacs in July and December 2020
- Total expenditure for the course including inflation within it is 23.1 lacs
The deployment of cash from your resources seems much simpler now. You only need to arrange for 2.5 lacs in July 2017. If you are working in a job or business, it should be possible to save up this much money over the next 18 months. Even if you are not working, you will have the option of redeeming some of your debt instruments to get this done, under the assumption that equity markets have still not recovered by then.
What about December 2017 and thereafter? Well, you can continue in exactly the same manner. There is nothing like paying for the goals from your active income. Believe me, I have done it for my children so far and that is the best way. I am not saying that you should not invest for your children’s education or other goals, just that there are other ways of achieving that objective also.
What you must not do is panic and shift to debt by selling at a wrong time in the market. That will destroy your wealth like nothing else will. Your portfolio may be down 40 % today but the loss is really a notional one, it is only when you convert it into an actual loss by selling you have made sure that no recovery is any more possible.
I hope this has given some peace and succor to all of you who have been worrying about the imminent financial goals. At a broader level, forget this whole silly business of having different portfolios for different goals and shifting from debt to equity 3 years before the goal etc. These are completely senseless ideas which sensible people must avoid.
If you want to know more about it, just read through the posts in my blog on the 3 portfolio strategy.