Unbalanced Acts: Rethinking Naive Use of Historical Returns in Retirement Portfolio Strategies

Abstract

This study builds on "Balancing Acts: Safe Withdrawal Rates in the Indian Context" (Raju and Saraogi, 2024) by critically examining the pitfalls of relying on short-term average returns and historical drawdown data for retirement portfolio planning in India. We introduce a robust analytical framework that underscores the complexities introduced by volatility and the significant effects of drawdowns on retirement savings. Using empirical data from the Nifty 100 index, our analysis demonstrates that conventional planning methods often overlook the ’volatility drag’ and the extremity of potential drawdowns, leading to an overestimation of expected future portfolio performance. Our findings suggest a shift towards more conservative estimates of future returns that incorporate a nuanced understanding of volatility and a comprehensive approach to managing drawdown risks. This research is vital for investors and financial planners aiming to fortify retirement strategies against the uncertainties of market behaviour and its long-term impacts on financial security.

Keywords: Retirement Planning, Volatility, Drawdown Assessment, Safe Withdrawal Rates, Portfolio Management, Indian Financial Market

JEL Classification: G11, G17, G23, E21