What retirees should keep in mind while investing in the stock markets

Higher returns: Historically, equity has offered higher returns than other asset classes. For instance, over the last decade, gold has generated a CAGR (Compound annual growth rate) of approximately 5.43%. Fixed deposit rates have been falling over the last decade and are presently hovering around 5%. According to the Reserve Bank of India’s House Price Index, the average return from owning real estate between June 2010 and June 2020 was 11.6% per year. Between October 2012 and October 2022, this was less than 9%. The actual returns on real estate might be lower if one considers the interest charged on housing loans. However, Nifty has generated CAGR of about 12% during this period. One would also do well to remember that equity is a highly liquid asset.

Inflation beating returns: Advancements in healthcare and a rise in standards of living mean humans enjoy longer lifespans. It is likely that one may live 25-30 years more post-retirement. In case of early retirement, this number could be higher. If one invests only in debt or fixed-income instruments, one may not beat inflation or create wealth. However, investing judiciously in equity can help one get the benefits of compounding and high returns to create lasting wealth in the long term.

Investment corpus: If an individual who has retired at the age of 60, invests ₹25 lakh in an equity portfolio that provides a CAGR of 15%, then the value of this portfolio would be ₹1 crore in 10 years by the time they turn 70. A portion of this corpus can be used for some discretionary expenditures such as holidays; part of it kept aside for contingencies, and balance continued for further compounding. Just like 50 is the new 30 now, 70 is the new 60 and we see several elderly couples going on vacations in groups or with families even well past 70 years of age.

Have experience? Use it: Some retirees have a deeper understanding or knowledge of a few sectors or some companies. This would enable them to make informed decisions about investing in the right stocks. Second, retirees have a better understanding of the developments taking place over the long term.

Dividend income: One of the best ways to earn from equity investments is through dividends. Sometimes, the dividend yield can be on par or higher than the yield offered by real estate or even fixed deposits. One can look for dividend aristocrats, i.e., businesses that have kept increasing their dividends over the last 25 years.

It is important to remember that risk appetite and investing horizon will differ for investors. It is usually recommended that retirees invest 20-25% of their portfolio in equity. However, depending on one’s retirement corpus and risk appetite, a retiree can also invest up to 50-55% in equity.

Retirees can consider investing in comparatively less volatile stocks such as large-caps with robust fundamentals. Hence, retirees could lower the risk of their stock allocation by focusing on dividend-paying, less volatile blue chips without reducing expectations on their anticipated returns.

Retirees must remember to complete due diligence thoroughly before investing. If one does not have enough knowledge, then it is necessary to seek suitable guidance from a registered investment advisor and this is the right approach to creating wealth.

Before investing in equities, retirees must set aside an amount equivalent to around three years of living expenses in fixed deposits or similar liquid instruments. This can serve as an emergency corpus.

Additionally, it is recommended for a retiree to own health insurance to handle medical exigencies. The surplus can be invested in equity through a combination of lump sum and systematic investment plans. Since equity is volatile in the short term, there is a chance of one’s capital being eroded if the broader markets aren’t doing well. This would help a retiree to avoid encountering a situation where funds are required at short notice, and the value of one’s invested corpus is down.

Jaspreet Singh Arora is chief investment officer at Research & Ranking