With the Sensex and Nifty reaching new all time highs, retail investors are looking to increase their exposure to equity now. Even the so called affluent investors are also not immune to this. Is this what the psychologists call ‘irrational exuberance’? Nifty has generated a return of 30.30% in the last one year and bulk of this return (17.10%) has come in the last 3 months. This has generated lot of optimism in the market and every investor is willing to take huge exposure in equities.
Whenever market moves northward, you find more and more money getting into equities. Is this the right way to invest? Aren’t they trying to time the market that is very difficult for even established Fund Managers? What should a retail investor, who has access to limited information on markets, do in such a scenario?
A 24-hour routine in our lives includes time for self care and family , proper diet, adequate rest in the form of sleep and time at work. There are individuals who are out of gear here, by working too long or sleeping too long. I am not getting to the problems this imbalance creates as you are all aware of that. Work life balance is often the most debated topic these days and ensuring a good balance is the way to lead a successful life.
Likewise, in personal finance too ensuring a balanced mix of assets is vital to investing success.
I am not saying that the market is likely to fall from here and neither am I saying that this is a great time to invest in equities. I am not an astrologer who can predict the market. I lay more emphasis on preparing ourselves than predicting the future. As a Financial Planner, I believe this is the right way even if this involves sacrificing a piece of return here and there.
Use asset allocation & dynamically manage !
Dynamic Asset Allocation – This is a Portfolio management strategy that involves rebalancing a portfolio to bring back the asset pattern to the long term target. I have a three point formula, the basis of which is ‘Asset Allocation & Dynamically Managing on a regular basis’
This is very vital to investing success. First and foremost, you should know how much return your chosen instruments will provide on a yearly basis. If you do not have a clear idea of how much your chosen instrument will provide, it is better to get this information from your Financial Planner. For instance, if you are investing in equity oriented mutual funds, 15% compounded annualised return over a long term is an ideal expectation. Similarly, debt funds should provide you a return of around 8 to 10% p.a. Getting this into your minds is very much essential. Expecting superlative returns is not a sin but could land you in trouble. In the last 10 years, Franklin India Bluechip Fund has generated a return of 17.37% compounded annualised. Get these kind of benchmarks before concluding on the expected returns. Always ensure that your expected return is within the range of a long term performance of a scheme.
Depending on your risk appetite, arrive at an asset allocation pattern. There is no ideal ratio as far as diversification of assets is concerned. A sample could be like this – 65% in equities and 35% in debt. The task in hand is not to generate an ideal asset allocation but to stick to the decided asset pattern throughout. The essential ingredient to success in investing is to maintain this ratio through the crests and troughs of markets. It is more of emotional intelligence that is a rare commodity and that is one of the reasons, why even affluent investors make mistakes.
Now that the equity market is going northward, it is the right time to take a look at your portfolio and find out how the equity schemes have performed. This is not the time to blindly put money in equities. If your asset allocation at the time of investing was 65% equity and 35% debt which is now 75% equity and 25% debt, then move the 10% excess in equity to debt to rebalance the portfolio. The best part of this strategy is to reduce exposure to best performing assets and increasing exposure to underperforming assets. This may look senseless in the short term but very rewarding in the long run. This also looks very easy but difficult to practice.
There are various other models of establishing an asset allocation to your portfolio. I personally feel that this is the simplest way of achieving your desired goals.
The key things to be monitored while deploying this strategy are
The million dollar question: What happens when the market keeps moving after my partial exit from equities? Am I not losing an opportunity to generate more returns? I call this ‘Yeh dil maange more’ disorder!
Every investor is often confused with this question. If you are planning your finances, the first priority is to ensure that you plan to reach your goals with minimum fuss. The objective is not to get maximum returns out of your investments but to inject certainty of reaching your goals at the right time. This definitely calls for discipline and sacrifice.
If this is not convincing, then adopt a core and satellite strategy to your portfolio. The core portfolio should be linked to your vital goals that you cannot afford to miss in your life. Here deploy dynamic asset allocation strategy. Period. The satellite part of your portfolio can be used for tactical calls. If you feel that the market is poised to leap higher then take a dip and enjoy the ride. But be prepared to face any eventuality in the end.
So, avoid the mad rush to equities always! Adopt a strict asset allocation and dynamically manage to a rewarding investment journey.