There is sometimes a tendency to think that investing in equity is only for youngsters. After all, when you’re young, you have income from your employment (so it’s no problem if your young portfolio doesn’t provide you any income); your investing horizon is far away, so you can afford to wait for equity to give you spectacular returns; and you’re more willing and able to take risks. As you get older, one by one all those ‘youngster’ advantages get chipped away: you retire and need to rely on your portfolio (and/or your children) to support you; your horizon seems to have moved a lot closer and you don’t think you have the time to wait for those fabled equity returns; and you’re less willing to take risks and bet on uncertainty.

So, is equity not for elders? The answer is a resounding, “Equity is for Everyone.” And you can put that in capitals.

The trick to making equity work for you as you grow older lies in the same principle that underlies all successful portfolios: asset allocation. Asset allocation is useful when you’re young and starting off your portfolio. As you get older, asset allocation is not just useful, it’s critical. Broadly speaking, asset allocation refers to the rules that you use to decide how much you should invest where. Or, more appropriately, how much you should invest in which asset class, and a simple way to handle this is to think about your investments as either debt or equity.

Debt is the safe option – your money is safe and your returns are predictable, both in terms of value and timing. Equity is the opposite: you could lose a goodly chunk of your investment and you have no way of knowing for sure how much you will make and when.

So, why should you invest in something that could lose you money? The answer is counter-intuitive: investing only in debt is sure to lose you money, while sprinkling in a bit of equity gives you a fair chance of making decent (and sometimes indecent) returns. While a debt investment looks like it’s always making you money, in reality, debt returns almost by definition do not beat inflation. So, over time, the return that debt provides you has a way of being eroded because the value of that money keeps falling.

If you’ve lived past your teenage years and into adulthood, it is a given that you will have realised that things and experiences that cost you x when you were younger, now cost you an unreal multiple of x. I have clear memories of bunking college and catching a matinee for the princely sum of one rupee and ten paise. If I were lucky enough to be going to college now and bunking per usual practice, a movie would set me back about five hundred times what I paid for it while I was in college. And it’s more of the same as you get older.

This means that if you rely solely on debt to provide you returns to keep your body and soul together and food on the table (and any other platitude you’d like to use), you are going to be in trouble a few years down the road.

Equity, on the other hand, will not provide you predictable returns. Indeed, in some years it may even look like a losing proposition, but if you’re smart and patient about it (and a wee bit lucky), over a period of time (usually between three to five years) equity tends to provide returns that are higher than inflation. This means that you will have managed to conquer that particular bogey.

The attentive reader will have noticed a couple of paragraphs ago (when inflation was lower) that I defined asset allocation as rules that you use to decide where to invest. Asset allocation is such a critical and intrinsic part of building a stable portfolio that it merits a series of articles dedicated to it. So, we’ll do just that. For now, understand that you need to frame your own rules about how much of your portfolio you should invest in equity and that is a function of who you are, how large your portfolio is, and what returns you need from it. And if your rules don’t include an appropriate allocation towards equity, you are asking for trouble.

There are thumb rules and guidelines you can use when determining how much to invest in equity, but the starting point is that equity must have a place in your portfolio no matter how old you are.