One of the main reasons stock market and other bubbles get created is that we all love good times and good stories. It gives us an emotional kick to see that a stock that we hold has gone up by 10 % in a couple of trading sessions and the MF portfolio we hold has been clocking impressive gains over the last few months. In our heart of hearts and also in our rational minds we do know that the party will end, sooner rather than later, but it is far more exciting to believe that it somehow will not.
We all understand asset allocation at a fundamental level so I am not going into details. However, in simple terms for most portfolios of investors, the following need to be kept in mind when we are looking at asset allocation:-
- Assuming you have 2 main asset classes Debt and Equity, decide on an asset allocation for yourself.
- In my view you must have at least 35% in Debt. This is fairly easy once you take your PF account money into consideration.
- Periodically review to see if the allocation has got skewed by more than 5 %. In such cases sell from the higher asset and buy into the lower one.
- For example, right now due to the run up in the markets your equity allocation may be 72% and debt 28 %. Sell off some equity and put it into a debt product such as Liquid fund etc. This provides your partial hedge against a market downturn.
- What to sell? Again, look at stocks or MF which have run up the most and use your judgement as to which looks like the best bet.
What is my take on the current situation? I feel that there is a little more steam left in the markets yet, the Nifty may well reach 11800 levels by end of this month. However, beyond that or even before there is every likelihood of a correction to 11000 levels and below.I do not believe that we will really see a crash in the Indian markets in the near future, unless there is a change of power at the centre.
Based on the above premise take a serious look at your asset allocation this week and next. It is tough to sell something which is doing so well but you are really protecting some gains and limiting your future losses by doing so. Many people may tell you that you should simply hold and that the gains will again come back in the future. However, that is speculative and asset allocation is a way better strategy which is also a proven one.
I am sure you have never done it in the case of your MF portfolio built up through SIP – one more reason why the way SIP is done and administered, leaves a real lot to be desired.
The reality of any bull market is that there will be intermediate cuts – some not so deep and the others fairly deep. At such points you have opportunity to add more to your portfolio in a productive manner, as long as you have cash to do so. Being conscious of asset allocation and having a strategy for the same allows you to do just that.