Should you trade after retirement?

Satellite portfolio is one you should create to capture short-term fluctuations in the financial market, especially equity and commodity market. We discuss whether you should manage your satellite portfolio only till you retire or carry the portfolio even after your retirement.

Your core (goal-based) portfolio is to set up a systematic investment on equity mutual funds and bank fixed deposits. This automatic process requires minimal intervention. Quite unlike your core portfolio, your satellite portfolio requires continual attention. Why? Your objective is to actively buy and sell stocks and, perhaps, even commodity futures to capture short-term price fluctuations in the market.

Your desire to maintain a satellite portfolio is, therefore, a trade-off between the time required to monitor the portfolio and the excitement of timing the market!

Besides the excitement, you should maintain a satellite portfolio till retirement for another reason. The cash flow you generate from the portfolio can be used to bridge the shortfall in your “child’s education portfolio”, or your “down payment for a house” portfolio. At other times, you may use the cash flow for unbudgeted expenses.

But should you maintain a satellite portfolio even after your retirement? The answer depends on two factors: One, do you use chart patterns to take short-term positions in the market? If so, you should continue managing a satellite portfolio even after your retirement; your skill to read the charts can earn you supplementary cash flows. On the other hand, if you trade only based on news, you should consider selling your holdings in the satellite portfolio. Why?

It is typically difficult to frame trading rules based on news. What would you do if a company announces financial performance? Sometimes, the stock may rise steeply. It may also decline despite good performance.

What if you face losses from your trading? Your ability to absorb losses is typically lower during your retirement . And, unlike chart analysis, news-based trading may not provide you a disciplined approach to managing money. Besides, you can use the sale proceeds from your satellite portfolio to supplement your retirement income portfolio — to buy investment products that can fetch you monthly income for your post-retirement living.

Two, cognitive impairment sets in as you age! This is especially true if you suddenly stop working after years of long work-hours; You may not be able to actively manage the satellite portfolio under such circumstances; for active buying and selling requires an agile mind. Outsourcing your satellite portfolio to an investment professional is possible. But that takes away the excitement of timing the market!

At retirement, your primary objective is to manage longevity risk — the risk of outliving your investments. So, what will you do if you have to meet unbudgeted expenses, including pampering your grandchildren? Your satellite portfolio comes in handy!

Besides, your satellite portfolio can be transferred to your children as a legacy portfolio. Why? You create a legacy portfolio for your children, which will be given to them after your lifetime. This means the legacy portfolio does not have a fixed time horizon.

So, a longer time horizon can heal losses in the portfolio. Alternatively, you may choose to leave a legacy only if you do not consume the money to supplement your post-retirement living.

So, the legacy portfolio will actually be a contingency fund, where the residual proceeds in the fund will be transferred to your children after your lifetime. In both cases your equity exposure can be traded through the satellite portfolio.

The writer is the founder of Navera Consulting. Send your queries to portfolioideas@thehindu.co.in