When Can You Break Conventional Investing Rules?

Standard guidance says hold some debt to absorb shocks and smooth returns

- Dhirendra Kumar

A 66-year-old reader once asked: why hold any debt when pension and rental income cover everything—including two holidays a year? His investments were entirely in equity mutual funds and direct equity, and he saw no need to change. His case is exceptional. He owns his house, has employer-provided health cover, receives steady rent from commercial property, and has a regular pension. His children are financially independent. The gap between income and expenses is so wide that his portfolio is surplus money.

That's the key. Most asset-allocation rules exist because of the underlying assumptions that support them. Conventional asset-allocation advice assumes you might have to draw from your investments for living expenses, that sequence-of-returns risk matters, and that volatility will collide with monthly bills. If those assumptions don't hold, the rules can bend.

Holding debt
Standard guidance says everyone should hold some debt. A debt bucket absorbs shocks, reduces the portfolio's ups and downs, and prevents forced selling after a fall. But our readers don't necessarily depend on their portfolios for regular cash flows. In such cases, a high-equity allocation is defensible—the financial equivalent of being a young investor with a long runway.

Even so, caveats matter.