How to build your portfolio for retirement in current bear market

Currently, bear markets are in motion around the world as investors turn to panic selling as concerns about the global economic slowdown circulated after the US Federal Reserve delivered its third aggressive 75 basis point rate hike. Signs of another 125 basis point hike by the end of December 2022 have spooked markets. Last week, both the Sensex and Nifty 50 fell nearly 2% each. Last Friday alone, sell-offs in the market more than eroded 4.90 lakh crore of investors’ wealth. Investors are hesitant and a bullish stance seems impossible, at least in the short term. In such a case, understanding how to build your portfolio over the long term becomes important when you see stocks as a key mechanism, particularly for retirement planning. In fact, this bear market can be used to build a valuable portfolio for a prosperous future.

Last week on Friday, Sensex fell 1020.80 points or 1.73% to end at 58,098.92. Meanwhile, the Nifty 50 plunged 302.45 points, or 1.72%, to close at 17,327.35. Heavyweight stocks were under pressure, dragging the markets with them. Banking stocks were hit the hardest, while capital goods, consumer discretionary and auto stocks also saw strong selling pressure. Sell-offs in mid-cap and small-cap stocks further dampened performance. Overall, there was a broad-based bear market.

The market capitalization of companies listed on BSE ended at 2,76,64,566.79 million by the end of September 23 – dive over 4,90,162.55 crore compared to the previous day. In the last four trading sessions from September 19th to 23rd, the market cap fell 6,77,646.74 million.

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In terms of market performance, Dr. Joseph Thomas, Head of Research at Emkay Wealth Management: “Equities markets traded lower mainly due to developments in overseas markets, particularly in the US. The Fed’s rate hike and stance that rate hikes would last until inflation is contained shows an aggressive and hawkish Fed. Even if it costs a little economic growth, be it so, this was the stated approach. This time, Fed policy comes with a projection of lower growth and gradually increasing growth. This came as a dismay to many market participants, who see this as confirmation that the US is beginning to enter a period of declining economic growth, growth that is already slowing .This has hit the stock markets and the repercussions are reverberating around the world. Above all, the expectations of higher interest rates and lower liquidity are what many investors have in the back of their minds.”

Shrikant Chouhan, Head of Equity Research (Retail) at Kotak Securities, believes that for the domestic market, one of the most important near-term events to watch for is upcoming RBI monetary policy.

Thomas added: “High inflation, widening trade deficit, weaker currencies and a likely slowdown in growth could trap some of the emerging markets. RBI policy is expected over the next few days and policy anchoring will be closely monitored to see the impact on the market at a time when the economy is experiencing high credit growth and a lack of money market liquidity.”

While Vinod Nair, Head of Research at Geojit Financial Services, said: “A surge in US 10-year bond yields and a strong dollar index prompted FIIs to flee emerging markets. A drop in liquidity in the banking system, a weak currency and a recent premium valuation make the market outlook bearish for the near term. With aggressive monetary policy action by central banks, the global growth engines are in slowdown mode, while India is currently in a better position as the Credit growth picks up tax collection surge. The current volatility could continue for a while. Investors are advised to wait and watch until the dust settles.”

How should you build your portfolio in a down market?

Surjitt Singh Arora, Portfolio Manager, PGIM India Portfolio Management Services said: “CY22 could be a challenging year for markets given the uncertain environment and slowing global growth. However, from a 3 to 5 year perspective, we remain bullish on Indian equities given that the Indian economy would be one of the fastest growing economies in the world.”

The portfolio manager pointed out some important principles to remember when managing money. These are:

Spend less than you earn

The only way you can be successful is to have more income than expenses each month. By spending less than you earn, you can set money aside for the future instead of living wage to wage.

Invest in stocks for the long term

Compounding is the 8th wonder of the world. Anyone who understands it benefits from it. As a rule of thumb: 100 years = % of investments; ie by the time a person is 30 years old they should ideally have 70% of their investment in equities (preferably diversified equity funds). One should invest at least 10 years to reap the benefits of compounding. “The time in the market is more important than the timing of the market.

planning for retirement

According to the rules of thumb, the retirement corpus should be 30 times the annual expenses in the year of retirement. For example, if inflation is 5% and you use the rule of 72 as a rule of thumb, then 72/5 would mean 14.4 years, or about 15 years. This means that at 5% inflation, an amount doubles in that time. In other words, an annual expense of 3 lakh will double 6 lakhs in 15 years and doubles again to 12 lakhs in 30 years. So a person at 30 retiring at 60 would have their current annual cost of become 3 lakhs 12 lakhs. He would need 30 times his living expenses – so his retirement corpus should be there 3.6 million.

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Disclaimer: The views and recommendations made above are those of individual analysts or brokerage firms and not Mint.

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