After crashing out to 7,500 levels during the March meltdown due to COVID-19, Nifty rallied to its previous high beginning this month and now is patronizing at its all-time high near 12,800 levels. Investors who didn't prepare during the panic and sell in March / April must now be sitting notably and investors who used the March revision to tactically invest in equity would have made considerable profits.
There are two sorts of feelings when the market is at its all-time high. One feeling is of bullishness and expectation of preparing for good returns in the short to commonplace term. The other atmosphere is one of shock about an impending correction. If you tune into business courses or read expert views, you may get a sense of confidence and also hear concerns about estimates. You get similarly mixed views about the marketplace. Investing should not be about expectation or hopelessness. You should always invest according to a plan and continue disciplined. In this article, we will review what you should do in this situation.
Asset allocation is essential
Asset allocation is a policy to balance risk and returns by investing in different asset categories. Diversification across asset classes can greatly reduce risk and generate potential superior returns in the long term. Financial planners suggest that the right asset allocation is significant in achieving your financial purposes. The ultimate price move of one asset class relative to another can skew your asset allocation and the overall risk outline of your portfolio.
The chart beneath shows how 50:50 asset allocations in property and fixed income made 10 years back were received over time. In this example, we have assumed that investment allocation in Nifty 50 TRI and that the firm income asset gave a 7% annualized gain.
You can see that at periods, the equity allocation was well underneath 50%, and at other times, fixed income was way below 50%. In this example, currently, your grant allocation will be 55% and your fixed income asset allocation will be 45%. To support your target asset allocation, you require to rebalance your asset allocation i.e. switch from equity to fixed income to sustain asset allocation at 50:50.
Invest according to your financial objects
Do not let market levels prescribe how you invest for your long term goals. While equity is animated in the short term, past data shows that equity gives good returns in the long term. We had many bear markets over these 20+ years. You can see that even if you spent at market peaks, the market would have improved if you had an adequately long investment horizon. Some improvements take less time, while others take a longer time. You need to have a monetary plan and invest according to it in a disciplined way.
Systematic Investments for financial purposes
We have stated several times in our post that SIP is the ideal way of investing for your long term aims and wealth. Market levels are unnecessary in SIP because of Rupee Cost Averaging. Some people misguidedly claim that SIPs are not suitable in bull markets because you buy at higher and higher prices. These people are dropping the fundamental point regarding SIP, which is about disciplined spending and creating long term wealth within the power of compounding. It is as difficult to foretell how long bull markets can last as it is to predict when the bear market will bottom. Sometimes the bull market can persist for many years. Do not try to others guess the market. Simply adhere to your investment plan.
Choose separate asset sub-categories wisely
Midcap and small caps have the potential to deliver a higher return in the long term. Midcaps and small caps better large caps in bull markets and underperform in bear markets. So early grades of bull market demonstration might be a good time to get some expression to midcaps and small caps. Midcaps and small caps have underperformed in India across the last 2 years or so. They are now on their path to improvement. If you switched from small / midcaps to large caps over the past several years, now is the time to return your asset allocation and tactically allocate a portion of your equity portfolio to these sections. However, you should assure that you do not overextend yourself in riskier classes because it can come to haunt you when markets turn explosive. You should always invest according to your risk desire.
Diversification is essential – invest in mutual funds
Bull markets are times when you get heated tips about stocks that are about to give multi-bagger returns. In most cases, these are just market rumors or rumors which you should not fall prey to. Diversification is very crucial in investing and more so when the economy is regarding recovery from a crippling recession. Diversification will not only diminish risk but can give superior risk-adjusted returns because knocked down sectors and stocks will benefit the most from the economic recovery. Mutual funds are the best investments from a diversification viewpoint. They invest in a diversified portfolio of stocks across different business sectors and are managed by professional fund managers, that are much better informed about the prospects of different stocks than ordinary retail investors and their information sources.
Weed out failures from your portfolio
Many investors do not want to settle their funds at a loss, even if they are performing poorly over an adequately long investment horizon. It is just human psychology – we do not want to waste money. Getting rid of poor players in bear markets is even more difficult from a psychological standpoint because the losses are more eminent. A bull market will drag even the poor performers higher, albeit less than the good performers. This a valid time to take another look at your mutual fund portfolio and see which funds have not worked well over a sufficiently long investment horizon because your losses will be lower now. Do not delay to weed out poor performers, even if you are losing money. Switch over the funds that have a good long term play track record.
One of the most essential attributes of successful investors is that they are planned for both good and bad times. The decisions made in the bull market will survive you in good stead in the bear market and vice versa. Stick to the fundamentals of financial outlining. Invest according to your aims and risk appetite, focus on asset allocation, expand, and above all remain disciplined in your investment plan.