How to balance a portfolio with magic of maths


Everybody in the investing world probably heard the must requirement of portfolio balancing depends on your age. Balancing your portfolio between equity and debt investment instruments entirely depends on the Golden Investment Balancing Rule, “Reducing your age from 100 and have the resulted percentage in equity and rest in debt instruments”. For example, if your age is 25. Subtracting 25 from 100 will give you 75. In your case, your portfolio should have 75% of equity exposure and 25% in debt instruments. I agree.But there is a hidden and difficult part if you look deep inside to this balancing formula. Before saying the same, you should know what the exact result the rule makers intend to give by this rule.By this rule, someone should balance there portfolio properly from the younger age when he starts investments with maximum equity and minimum debt exposure. But, when he reaches to the age of retirement, his portfolio should have maximum debt and minimum equity exposure.Here is the confusing part: As per the balancing rule, suppose you are balancing your portfolio each year by arranging equity and debt depends on your age. If you are in the age of 25, your equity exposure is 75% and debt exposure is 25%. When you are reaching to the age of 45, your equity exposure is 55% and debt exposure will be 45%. OK. You are reducing your age from 100 in each year and rearranging your portfolio between equity and debt investments. Now you are planning to retire at the age of 55. With your present plan, when you are reaching to the age 55, your equity exposure will be 45% and debt exposure will be only 55%. Then how this rule will be suitable to you? It is saying a person in the age of 25 requires an equity exposure of 75% and debt exposure of 25% by reducing present age from 100. Also saying when he is in the age of your retirement, here it is 55, his equity exposure should be 10% and debt will be 90%.Confused? !!! Read below.With the rule, what mistake happened to you? You are clearly obeying the Golden Rule and to get the right investment proportion, reducing your age from 100 and having equity and debt exposure as per the result. But you forgot the error, to get the 10% equity and 90% debt exposure, you required to reach at the age of 90 instead of your planned retirement age of 55%.What you want to do now. Suppose your age is 25 and your initial investment is 1 lac. We will first balance this 1 lac investment between equity and debt in the correct proportion from the age of 25 and till the age of 55. The ultimate result at the age of 55 is 10% in equity and 90%.

Term used to calculate the same is:

A person with 25 age carrying 1 Lac investment till the age of 55. He should invest 409090.91 in debt and 590909.09 in equity at the age of 25.

Debt investment amount calculation is: Amount*Age/55 and reducing 10% from the result. This 10% is ultimately your 10% equity investment at the retirement age.

Equity investment calculation: Amount – In Debt

Debt investment: 100,000*25/55 = 45454.45 and deducting the 10% from this amount will give the Debt investment value of 40909.09/-

Equity investment: 100,000 – 40,909.09 = 59,090.91/

This is the case of only 100,000 lac that he is carrying from the age 25 till 55. What about if you adding additional amount to your principle each year? A slight alternation on the above calculator will give you the exact result. Below is the table showing a person adding additional amount of 1 lac each year:

No we have found method to balance a portfolio with single amount investment and balancing portfolio with adding amount each year.

Now, it is the time to discuss about balancing a portfolio that giving a 6% returns annually to your investments in a compounding basis. ( I have mentioned 6% to ease the calculation only. For debt investments, you can expect a minimum of 6% and equity you can expect between 12% to 100 or more percentage depends on your investments.) Below is the list, how your portfolio growing each year with returns along with your regular addition of 1 lac in each years.

That’s all.

Inform me to once if you required the calculator. I well send to you bu return mail.

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