Asset Allocation

आए तो यूँ कि जैसे हमेशा थे मेहरबान, भूले तो यूँ कि गोया¹ कभी आश्ना² न थे
                                                                                                            -Faiz Ahmed Faiz

1- Jaise , 2-Acquaitance

Faiz may have not thought it this way but this para from his poetry describes the behaviour of our equity market in a very beautiful way. When the bull run starts, markets behave as if there is not looking back and it will continue forever; something that we saw in the last equity rally between 2014-2017. The second line explains the bearish phase which started from 1^st Feb 2018; wherein the markets took a U turn post Feb 2018 and since then we have not seen any signs of recovery.

When the markets are in bullish phase, we stop looking at valuations, corporate governance issues, etc. and during bearish phases we start doubting the best of companies. This happens in every market cycle and will happen in future also. The only way to get saved from this euphoria of getting carried away in either direction is following asset allocation strategy.

Once you have identified your goals and you are aware of your risk-taking ability, decide on an asset allocation strategy and follow that religiously. Asset allocation strategy simply means that dividing your investments in debt and equity depending on your risk profile and how far or near your goal is. For e.g. In a bull run, mid and small caps tend to outperform large cap funds but that does not mean that we move our entire portfolio to mid and small caps. Same way we should not move our entire portfolio in large caps when markets are not in our favour. In equity allocation, your portfolio should be divided between large caps, multi caps and mid-caps. Though one can change the allocation by 15-20% up or down depending on the market scenario; one should never change the entire portfolio.

Same way one should never have his entire portfolio in equity or in debt. It should be a mix of both the asset classes. There is no defined rule for how much equity or debt one should hold as that will depend on each individual but as a thumb rule your debt allocation should not be more than your age. So, if you are 40 years old, your debt portfolio should be around 40%. Again, this is just a thumb rule and will completely depend on each and every individual as per his risk profile and how far or near his goal is.

Its highly risky to keep your entire portfolio in equity as during these bearish phases which we are witnessing now where large caps have corrected by 10-15%, mid cap by 30-40% and small caps by 50-70%; the probability of losing your capital increases. Same way if your entire portfolio is in debt then you restrict your money to grow. For e.g. if your goal is 10 years away, it is criminal to invest in debt funds. For such goals you should invest in equity funds and for goals which are say 2-3 years away one should invest in debt fund. This way you will reduce the impact of market volatility and put your money to best use.

While doing asset allocation considering your risk-taking ability is of utmost importance; followed by your return’s expectations. The amount of risk that you can take depends on your inherent nature and it’s difficult to increase it or decrease it, whatever said and done. It’s easier to invest the way your friend or colleague is investing but seldom we know their risk appetite. When one invests without considering their risk-taking ability, the chances of taking wrong investment decision increases. You will either sell too early or wait too long.

The most important key to successful investing can be summed up in just two words-asset allocation. – Michael LeBoeuf

THE LAZY INVESTOR

Bill Gates once said, “I always choose a lazy person to do a difficult job because he will find an easy way to do it”

You know what’s the most difficult part in investing? It’s ‘Doing nothing’. With so much of noise around you, about your colleague making “x” return and another friend making “y” return, it’s really difficult to not do anything. As we don’t want to be left behind, we tend to take some action. We don’t take action to make money but only because of the feeling that if someone is making money or making more money than me, then why I can’t make the same amount of money.

Do you remember, the famous dialogue from the movie 3 Idiots “Jab dost fail ho jaye to bura lagta hai, but jab dost 1^st aa jaye to jyada bura lagta hai? “ Same way when our friend loses money, we feel bad, but we feel worst when they make money and we don’t.

Secondly, we are taught that unless we work continuously towards our goal we will not achieve it, and so we apply that to investing also. There are people who are always on top of their portfolio and ready to do some action. If markets are falling, they want to redeem money; if it’s going up, they want to add more; if Fund A  is under performing F, they want to change the Fund A and when Fund C  starts performing better than Fund B they want to dump Fund B. They feel that unless they take continuous action, they will not be able to generate returns in their portfolio.

This is where being lazy helps. It may not work in other aspect of life but in investing it works most of the time. Do you know the easiest way of doing this difficult job of investing? It’s SIP. It’s dull and boring, but apparently the most disciplined and prudent way of investing. Let’s look at some numbers to make it more relevant. Last 3 years return of Birla Equity Fund is around 4% CAGR but last 20 years is around 18% CAGR. Last 3 years return of L&T Midcap fund is around 0.5% CAGR but last 10 years return is around 16% CAGR. If one takes action at every downfall, he will seldom make money. The idea should always be to invest in a good fund house and a good fund, ride through the cycles and get good returns.

One should not change his mutual fund portfolio actively as the fund managers are doing this job on behalf of investors. Most of the good fund managers change the sector and stock allocation in their portfolio actively based on the market scenario. This not only reduces the cost for investor but also the hassles of entering and exiting the portfolios every now and then. You should change the funds only when they start giving below average return and there is no sign of improvement.

Being lazy does not mean stop tracking your portfolio but it simply means that taking the decision of inaction after looking at all the aspects. Being lazy should be by choice and not otherwise.

‘MDBSC’ – This term was coined by one of my Facebook friend. It means My Dull and Boring SIP Continues. So, whenever your friend or colleague comes and asks what are you doing in this market, simply say MDBSC. (My Dull and Boring SIP Continues).