My 3 portfolio strategy works best in a market crash

I am sure most investors are shell shocked by the turn of events over the last 2 months. For me, even with my decades of market experience and that of 2008 downturn and so on, the fall has been pretty brutal to say the least. My combined equity portfolio in stocks and MF got whacked down by more than 20 % in a few day, not to speak of the cuts of the previous months that it had witnessed. The point brought home rather forcefully is this – it is one thing to understand the nature of equity returns, quite another to experience it in real life.

However, the good part in all this is that the crash was not the first of it’s kind and in all previous instances the markets had stabilized in the medium term. This time, the global factors and the domestic situation in India are both against a quick pull back in the markets. I can foresee a lot more pain in the markets over the next few days and the earliest signs of some turnaround for us may well be linked with the election outcomes and quarterly results of Q3. As far as your investments go, it will be a good idea to deal with them as outlined in my other posts.

As I have said before, such times of tribulation are a good instance for checking out whether your overall investment and asset allocation strategies are designed to weather the storm. If you are following the 3 portfolio strategy of debt, MF and stock portfolios then here is how you are affected and also some pointers as to how you need to deal with the context:-

  • Your stock and MF portfolio will undergo serious cuts, more so than what you have witnessed so far. It is quite possible that by the time the pain is through these can reduce in value by 30-35 %.
  • More importantly, you will suddenly see your SIP amounts of the last 2 years or so starting to show much less returns, some of these will be in the negative territory.
  • As a lot of the portfolio value of MF was really dependent on 2014 rise in the markets, the current crash will have a severe effect on overall XIRR. It will definitely fall to single digits if this continues.
  • Continue your SIP and add more MF units manually from time to time. You will find it difficult to predict market bottom, but considering the long term growth potential, every 5 % cut is a good investment opportunity.
  • For your stock portfolio make selective purchases in stocks you want to have in your portfolio. As always, do not put a big sum of money at one go, use price triggers and ensure your unit costs are coming down.
  • If you are not comfortable to buy into equity now, park your surplus money in Liquid funds for later use.
  • For those who are working and have an active income, some specific pointers are as follows:-
    • Continue investments as before, stopping SIP will really be a bad idea at this time.
    • Build up your cash reserve if you believe there will be better buying opportunities round the corner.
    • Your equity portfolio is for your long term goals – in that case do not worry at all.
    • If any of your goals were coming up shortly and your plan was to redeem part of equity portfolio then you need to change your plan. This is the wrong time to sell equity, look at getting the needed money from debt.
  • For people in the FI state like me, some of the specific pointers will be as below:-
    • Check how much of your passive income stream was dependent on equity. For example, in my case the income from dividends in stocks and MF amounted to about 30 % of my annual needs.
    • Understand that contribution from equity towards passive income will reduce in this and possibly next year. You need to have alternate sources now.
    • One way can be to look at generating some active income through what you do. In my case, I will be putting more efforts into getting Consulting assignments now and over the next 1 year.
    • If you had a goal which was depending on equity redemption, you may need to check the feasibility of postponing the goal. Your debt portfolio will need to generate passive income and it may not be a good idea to leverage it for your current goals, unless absolutely essential.
  • For people in retirement, most of the above will apply, except for generation of active income part.

People not familiar with the 3 portfolio strategy can read about it here. If you are interested in building up these 3 portfolios for your own investments read this post. The fundamental concept is that your equity portfolios have been grievously injured now and may well sustain further damage in the near future. The only real way to help it recover is to give it time. In time, markets will recover at least in India we can be reasonably assured of future growth. How much time it will take, none of us can really foretell.

Till then you need to be conservative with where you put your money and also a little ambitious in seeing if putting some money into equity makes sense.

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4 thoughts on “My 3 portfolio strategy works best in a market crash

  1. Sir, you have mentioned one point and I quote “considering the long term growth potential, every 5 % cut is a good investment opportunity”.
    I have a couple of questions regarding this: 1. What do you mean by 5% cut? Does this refer to a fall in the stock market? How can we track this?
    2. What is the ideal period to consider for this fall? In the recent past, what I have done is, every day the sensex falls by around 1%, that same day, I used to put in some surplus cash in the MF. Is this wise? Of course, I have continued my Sip without stopping, just made additional purchases in this manner.
    Thank you.

    Like

    • A 5% cut can be in the markets or even in the stock you are tracking. There are enough sites which will give you this.

      As for the period you can look at a week as such a fall in that duration will be significant.

      It is good that you are investing in dips but it will be better for you to make a holistic plan for your investments. In case you want to discuss more write to me at rajshekhar_roy@yahoo.co.uk

      Like

  2. Sir,
    In this current situation would buying something like Maruti Suzuki make sense?
    Given that it has also fallen from its 52 week high.
    This is also in reference to your earlier post (sometime in January) which had Maruti as one of your major holdings.
    Regards,
    Tejas

    Like

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