I’ve never known anybody who can time the market. I’ve never known anybody who knows anybody who can consistently time the market- Burton Malkiel
Aiming to time the market is futile.Purpose of this article is to focus more on asset allocation. We all know that right asset allocation is the main driver of portfolio returns. In my personal experience, a simple approach to investing works the best. Some simple ideas that have worked for me are:
- Invest regularly at all times through SIPs or STPs from liquid funds
- Invest more when valuation is attractive (NIFTY P/E less than long-term average P/E of 18.9). In your asset allocation, have high equity component when equity valuation is attractive.
- Take some money off the table when valuation is expensive (NIFTY P/E >22.3, 1 standard deviation above long-term average). This means having fixed income oriented portfolio when equity valuation is rich.
The below points illustrate this:
Keep investing in equity systematically
have to be “in” it to have a chance to “win” it. Given the fear of sharp correction and our natural inclination to invest at the bottom, we all tend to suffer from decision paralysis. As a result, we never have a decently good allocation to equity. Now equity returns don’t move in straight line. There could be prolonged period of flat market. Rather than being disappointed with lack of returns or equity underperforming fixed income assets, this is the time to sow the seeds. Keep investing because when the tide turns, one must have decent allocation to benefit from higher return.
Boost equity allocation when valuation is cheap
Whenever valuation (For NIFTY PE average PE is 18.9) is below average, it’s a good idea to top up a SIP or start a new STP from existing fixed income mutual fund holding. When equity valuation is 1 standard deviation below historical average (NIFTY PE of less than 15.4), equity allocation must be high (at least) 75%.
Sometimes, trailing P/E ratio could be misleading, especially at cyclical troughs, when trailing P/E ratio can be high and give a false impression of rich valuation. No approach is applicable for all the times. The crux of the matter is to opportunistically increase equity allocation when valuation is cheap or when market has seen sharp decline.
Don’t stop SIPs when equity valuation become rich
When NIFTY PE is more than 22.3, it is better to book all your long term capital gains and shift the money to a liquid fund. However, even at this time don’t stop SIP. Personally, I will avoid mid caps and focus more on large cap oriented balanced funds. Portfolio risk can also be reduced by switching mid-cap funds to balanced or large cap funds. This booked profit should be used for equity investment when valuations head towards historical average.
This is a way in which one can look to boost his returns above the market returns. We do not need to do this every week but once a quarter should give an idea about valuation and we can make necessary asset allocation adjustments. We can get NIFTY valuation data from here. This article is not a recommendation to buy or sell and meant for information. Consult your financial advisor for making your investment decisions.
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