Trimming equity exposure: how to rebalance risk according to long-term goals

I started investing aggressively when markets were doing well. Now I’m uncomfortable with the amount of equity exposure I have. Should I reduce it even if my long-term goal is still several years away?

– Name withheld on request

When you started investing can make a big difference to how you view your portfolio today. For simplicity, think of investors who started before 2020 and those who began investing more heavily after 2020.

If you started after 2020, you have seen a lot happen in a relatively short period. Markets recovered strongly after the pandemic and continued to rise, with equities doing particularly well through much of 2024. The Nifty 50 reached a high in September 2024, after which markets became more volatile and started moving up and down more sharply.

For some investors, this may have changed how comfortable they feel with risk. A portfolio that seemed perfectly comfortable when markets were rising may now feel too heavily invested in equity.

Those who started investing before 2020, on the other hand, may have already experienced more market cycles and seen how equity can reward investors who stay invested over the long term.

Start with goals

So, if you are wondering whether you have too much money in equity, it may help to look beyond what the market is doing today and focus on what you are investing for and when you will need the money.

For example, if you have a retirement goal that is still 20 years away, there is a strong case for maintaining a higher equity allocation. Depending on your return expectations, financial situation and comfort with risk, 60-80% in equity could be considered, with the rest in debt.

Equity has historically delivered better growth over longer periods, although a mix of equity and debt can make the portfolio more balanced.

Match the horizon

The approach needs to be different if you are investing for a short-term goal. If you are putting money into equity for something you may need soon, it makes sense to bring down that exposure and move a larger portion towards debt or other relatively stable options.

Depending on your tax bracket and circumstances, arbitrage funds may also be considered.

Medium-term goals, on the other hand, need a middle ground. Say you want to buy a house in seven years. You may still want equity to provide growth, while debt can provide greater stability as the goal gets closer.

In such cases, 50-70% equity could be considered based on the time available and your comfort with market movements.

Build a buffer

There is another part of the equation that investors often overlook. An adequate emergency fund, along with the right health and term insurance in place, will ensure that you are less likely to sell your equity investments when an unexpected expense comes up.

So, feeling uncomfortable with your equity exposure does not necessarily mean you need to reduce it. What matters more is whether your portfolio still makes sense for the goals you are working towards.

Review it regularly, look at your overall asset allocation and diversification, and make changes when your goals or circumstances change.

Feroze Azeez, joint CEO, Anand Rathi Wealth Limited