It is good that you want to assist your parents in their money decisions. At the same time, you need to be cautious while handling their investments. What if the investments go wrong?
You may say that even if these investments were to go wrong, you will be around to take care of them. Yes, that’s your duty. However, your parents may not want to depend on you financially. In any case, family dynamics can change quickly. Therefore, when they have done all the hard work to accumulate a decent retirement corpus, you must be extra careful and not jeopardize their plans with your sloppy investment choices.
Many young earners don’t have much money to invest. Therefore, even if they make very good investment decisions, that may not mean much in absolute terms. In such cases, gratification is usually delayed and that may not be comforting. You may think, if you can access your parent’s retirement money (that’s likely to be big), that’s half the problem solved. With substantial investment money at their disposal, they can simply much focus on making the right investment choices.
Perhaps, I have too unkind a view of the world. My limited experience suggests that the intention, almost always, is to help parents with investment decisions. Your parents may not have much knowledge about investments and you just want to help them out. However, good intention does not mean that things can’t go wrong. Irrespective of the reason why you must manage your parents’ money, here are a few things that you must keep in mind.
#1 Your parents’ risk appetite may not be the same as yours. You may be quite comfortable with the volatility in the portfolio. As a retiree, he/she may not share your brave attitude. “Conservative” or “Aggressive” can mean very different things for you and your parents. For you, “conservative” may mean 70% equity. For them, 20% equity allocation may be “Aggressive”.
You must also understand that, for someone who has never invested beyond bank fixed deposits and LIC policies, the concept of a portfolio loss is alien. A substantial and sustained loss will make them very uncomfortable. Always remember, retirement portfolios are different. When you are young, you can make up for the losses or make a course correction through incremental investments. There is no such luxury once you have retired. The situation gets worse if you must withdraw from a depleted portfolio (sequence of returns risk)
#2 It is also easier to take risk with someone else’s money than yours, even when that someone else is your father. Therefore, don’t try to learn investing through a big portfolio that does not even belong to you. It is wrong. Many investors (both old and new) tend to underappreciate risk with volatile assets, especially when the times are good. Your parents don’t have to suffer for your enthusiasm and lack of understanding.
Learn about various types of investments, the relationship between risk and reward, different kinds of mutual funds, etc. by investing your own money (and not your parents). Read books. Read market history. Lose money and hopefully less money. Learn from your mistakes and try not to repeat the mistakes. Only once you are comfortable and confident (this is tricky), should you offer to help your parents by taking control of their investments. If you can’t do, let a professional take over and guide them.
#3 If you lose your money, you don’t have to answer to anybody. However, if your parents’ portfolio suffers because of your mistakes or sheer bad luck, you will have to eventually answer for it. Not easy to handle. Worse still, you may try to make up for the loss by taking even more risk. That can backfire. All this can even lead to friction in the family.
#4 Your parents may hesitate in asking you how their portfolio is doing. It is your responsibility to share with them the portfolio performance and the rationale behind such portfolio construction. Their queries or follow-up questions will tell you a lot about how they would want their money to be invested. Do note their expectations may not always be right. However, you still owe them an explanation. If their expectations are unfair, it is your duty to set their expectations right.
I manage my father’s investments (as I do for many other families). I have his complete trust. Even then, we discuss his investments on a regular basis. Sharing very basic information as the size of the portfolio and portfolio returns is comforting to him. That’s the minimum he wants to understand. I am not saying I have been able to meet his expectations. In fact, I hear “Bas itna hi” quite often from him.
At least with his portfolio, I have the liberty to choose asset allocation and I have chosen a conservative allocation for him. Most investors from our parents’ generation are fixated on Sensex (and not Nifty) levels. At a time when Sensex and Nifty have been a tear due to a sharp rally in a few stocks, the conservative portfolios are likely to underperform. By the way, you can also think of this as an excuse.
I don’t think my father is very happy with my response either. Then he usually says,” Theek hai. Chalo FD se to zyaada hi hai. FD mein to tax ke baad kuch bhi nahin bachta” (The return is at least better than a fixed deposit. You don’t get much after tax in a fixed deposit). Even these words convey a message. I think he is ok if he is getting more than a bank fixed deposit. That’s the best he would have done with the money at his disposal. If I go to him with a 3% return, I don’t know how he will respond. By the way, he tends to underappreciate the risk in debt mutual funds but that’s the matter for a different post.
What should you do?
There is nothing wrong with helping your parents with their investments. In fact, beyond a certain age, it may become difficult for them to put in the physical and the mental effort required to manage their investments. Your active involvement may be necessary.
At the same time, do not consider your parents’ retirement money your investment or mutual fund project. Their retirement money is not your opportunity to learn about investments. Their money is not to experiment with your investment ideas. Offer to assist them only when you are ready.
Always remember, their expectations and risk appetite can be very different from yours. They may not take portfolio losses easily. Their ability to take losses may be quite low. Discuss their portfolio with them on a regular basis.
Be open about investment options. Senior citizens have more investment avenues as compared to others. There may be far simpler options for their money. You don’t really have to over-complicate things. At their age, there may be far simpler investment strategies that can meet their income requirements. For instance, an investor in his 70s can earn a very high rate of return by buying a simple annuity plan. Staggering annuity purchases can be a very simple and risk-free way to generate income.