Sensex is over 50,000. Nifty is almost 15K.
Taken in isolation, these numbers cannot mean anything. However, current levels are almost double the 52-week lows from last year. A massive wealth creation over the past year. It’s not very often that you double your money in just a year, even if you invest in Bellwether indices like Nifty and Sensex.
By the way, did you take part in this rally?
They could have been scared and sold during the market turmoil or during the initial ramp-up. Or you could have recognized an opportunity and invested a lot and were rewarded. In retrospect, it can be said that investing more would have been a good choice. In real time, however, the decision to invest after an economic standstill didn’t seem like an obvious decision.
Well the past is over. You can’t change it.
What should you do now that the markets hit all-time highs?
Sensex at 50K: how do you approach that?
The markets regularly hit all-time highs. Otherwise, neither of us would invest in stock markets. You can’t get good returns if the markets don’t keep making new highs. So 52-week highs or all-time highs are not reasons enough to go slow. In fact, we saw in a previous post that investing in 52-week highs has historically been more rewarding than investing in 52-week lows. Not intuitive, but these are the results.
Come back. Sensex at 50K. What should i do?
Should you keep investing? OR
Should You Stop Investing More Money? OR
Should you take some or all of the money off the table?
Given that the Nifty PE ratio is around 40, you certainly need to be careful. There are reasons you can ascribe such high PE scores. For example, first quarter FY 2121 profits were wiped out due to the lockdown. OR the Indian economy is booming or expected to do very well. OR We should look at the consolidated PE values and not the standalone values. OR PE is not the right assessment measure.
Because of me. All of these points have some value.
However, we can always find reasons to justify almost anything. Given that all types of stocks are on the rise and valuation standards are at their peak (and this has resulted in lower future returns in the past), there is reason to be cautious.
A note of caution:: The independent PE exceeded 30 for the first time in July 2020. A completely new area for us. We had never seen a PE of 30 before. If you had withdrawn your money from the markets at this point, you would have missed a 35-40% rally in the markets. So the markets keep playing bowling. Always keep that in mind.
Diversify. Decide on the asset allocation. Rebalance
Is diversification No over with all your money in the best asset all the time.
Is diversification about NOT with all your money in the worst Performing Asset at any Time.
By adding low or negative correlation assets to the portfolio, you can reduce portfolio losses and improve investment discipline (and this is more important than many of us think). You can add domestic equity, international equity, fixed income, real estate, and gold to the portfolio.
Being in a single asset at all times is just too risky for most of us.
How much should you allocate after we have decided on multiple assets?
You should use an asset allocation approach. And stick with it.
There is no one right asset allocation for everyone. A young investor might be comfortable with a 70% equity allocation. On the flip side, a senior may not be able to digest more than 30% of the stock exposure.
The right asset allocation for you will depend on many factors, including your risk tolerance and risk tolerance.
I’ve done an exercise for the past 20 years to find the best asset allocation, but that’s just an Excel-based analysis. Take it with a pinch of salt.
You can work with asset allocation areas
For example, suppose you decide that you hold the stock allocation between 50% and 60% of your portfolio. 50% and 60% are random numbers. It could have been a different combination.
If you are comfortable You can tend towards the valuation of the stock markets higher end of the assignment area.
If you are Not If you’re comfortable with reviews, you may tend to be toward the lower End of the assignment area.
Accordingly, you can rebalance your portfolio at regular intervals.
You can either rebalance your portfolio to move the asset allocation within the target range.
You can adjust your incremental investments to approach the target range for asset allocation.
If you leave decision-making to your guts, you’re likely to get confused
You will either be overselling too soon. OR buying too much too late.
Had I left it to myself, I would have reduced my equity positions significantly in the middle of last year (August-September 2020). While it may still prove to be a good choice in the long run, it would have caused me a lot of pain in the short term (I can say that now). Our prejudices will make our investments difficult. And that’s never good.
While it is impossible to remove bias from our investment decisions, we can certainly reduce the impact by working with a few rules. And asset allocation is one such rule.
For most of us, rule-based investing (decision-making) is going to do a far better job than well-based decision-making in the long run.
Selling all of your stock investments (just because you think the markets have risen too much) and waiting for a correction is likely to be counterproductive in the long run.
Likewise, a sharp increase in equity exposure (after a market correction) can backfire. Further corrections can wait. Or the market remains untied for a few years. This is an even bigger problem when you are talking about individual stocks (rather than diversified indices). There are quite a few times when you lower your stock to zero. Of course, it can also be an immensely rewarding experience, but you need to assess the risks. And If you let your courage decide, risk assessment usually takes a back seat.
If you instead just adjust your asset allocation (or rebalance) to target values, you will never find yourself completely in or out of the markets. You don’t miss the benefit. So you will never feel left out (no FOMO or fear of missing out). And corrections don’t completely destroy your portfolio either. You won’t be too scared during a market collapse. This also makes it easier to deal with emotions. And this prevents you from making bad investment decisions.
All of that gyan. What should I do now?
I don’t know where the markets are going. I don’t know if we’ll see 60K first on the Sensex or 40K first. Or if we’ll ever see 40K on the Sensex again.
We will surely see 60,000 in the future. Whether it will happen in the next few months or in the next few years (or after many years) is a question.
If 50,000 seems expensive to you on the Sensex, you need to check your current stock allocation.
If your stock allocation is way ahead of your target allocation, there is a reason for it Realignment of the portfolio. Your target allocation was 50%. The current allocation is 60%. You can sell some equity (take some money off the table) and bring the allocation closer to the target values. I am not in favor of bringing the stock allocation to 0% no matter how expensive the markets may seem to you. I am also not in favor of stopping SIPs. Better to sell existing investments (to get back to target levels) unless tax considerations prevent me from doing so.
If your stock allocation isn’t far from the target allocation, you can just stick around or continue to invest.
There are no best rules when it comes to asset allocation and rebalancing.
You can work with very clear goals for asset allocation. Let’s say 60% equity allocation. You can bring the balance back to the target level every 6 months or 12 months. OR you rebalance if the stock allocation exceeds a certain threshold (e.g. higher than 65% or lower than 55%). And yes, don’t rebalance too often.
Work with asset allocation areas. Be on the low end of the range when the markets look expensive and on the high end of the range when the markets look cheap. This approach offers more flexibility. If you think the markets are expensive now, you are moving towards the lower end of the stock allocation range.
Photo by George Drachas on Unsplash