Hexagon Age vs Risk Hexagon Wealth
There is much written about a thumb rule that says your equity exposure should be (100 – age) which essentially means that one should reduce risk as you grow older. This is as general as advising someone with fever to take paracetamol without specific investigation into the cause etc. Let general rules be for general people.

The idea behind saying reduce risk as you grow older is the assumption that one will not be able to tolerate volatility or a drawdown in the portfolio. Or it could happen that for one who is very old there may not be enough time for the portfolio to recover in their lifetime. But what if one has enough wealth to sustain a downturn? Then there is no need to be avoiding equity, for the portfolio could well become a valuable legacy for the next generation. A lesson in risk tolerance (for us) was when we had a client who came to us at the age of 79 or so, and completely allergic to debt funds!! But his needs were less and he had a wonderful portfolio of blue-chip companies that were handed down to him by his father and father in law. He and his wife would visit our office regularly even when they were well into their nineties for a lively discussion on the state of the markets and a review of his fund portfolio. We miss them now – but needless to say the portfolio proved to be a very valuable legacy for his son. And I do know that he made very good use of it.

On the other hand, one could be young and not like risk. Maybe the goals are close by and critical. Or maybe the person is wired that way. It could be even that the person has sufficient wealth that risk is not needed to achieve goals.  In any case it is not a rule that the older one is, lesser should be the risk in the portfolio. It is purely contextual which the advisor should probe and recognise.

T. Srikanth Bhagavat

Managing Director & Principal Advisor