Don’t get worried about market volatility and jump to debt.
Investors have unrealistic expectations of themselves. They expect to accurately time the markets and weave in and out of various assets on time, every time. That is the stuff of dreams and mostly remains in the domain beyond our consciousness. But, not many are willing to accept this. And even those investors, who actually spend money to get advice on their investments, are more often, willing to change their portfolio each time there is a major flux in the equity market. This raises the question, how often should you churn your asset allocations? Knowing when to make changes and by how much is important, especially when the market is witnessing more falls than highs.
We save money for a reason. Many people save money for their children’s education, their own retirement, for building or acquiring a home and so on. Each of these goals have specific timeframes. And each goal has a priority. Investments for these goals, hence need to be done in a manner consistent with the priority and timeframe.
That is why financial planners usually come up with an appropriate asset allocation that will be suitable for a family, based on their goals. Once such asset allocation is decided and invested, it is a good idea to stay invested and not tinker the portfolio, too much. Doing so, will not let the investment grow even as you end up paying fees like fund management charges and brokerage and so on. Financial Planners generally invest with a long-term focus , to meet such goals.
MAKING STRATEGIC CHANGES:
It is of course necessary to periodically review the portfolio and see if the investments are performing, as per mandate. If there is a degradation in performance in an investment, generally you would be asked to reallocate into another investment in the same asset class.
However, there can be changes in the situation of the investor or in the macro environment, due to which major changes in asset allocation may be required. At some point, one may for instance take a strategic call to increase equity allocation by 10 per cent, in view of reducing interest rates and the possibility of low interest rates in future. This kind of a strategic change may be required when previous assumptions do not work any longer.
MAKING TACTICAL CHANGES:
However, there could be cases where one may want to take advantage of the current market situation to an extent without deviating much, from the strategic mean. After, a point, when the situation returns back to the previous normal, the allocation also comes back to the strategic allocation. An example will help here. Let us say the asset allocation suggested for Ramesh is, 60 per cent in equities and 40 per cent in debt. Due to the current market conditions, his advisor may now suggest a tactical realignment of equity to the extent of say 15 per cent, 10 per cent towards debt and 5 per cent towards gold. That may be suggested as both debt and gold are performing well now and the planner may want to allocate to these assets, temporarily. After a time, the allocation will come back, more or less, to 60 per cent in equity and 40 per cent in debt. So, tactical allocation may have a role to play but it cannot be allowed to change the strategic allocation itself completely. Like it was mentioned earlier, strategic allocation can change only if there are major changes in the client situation or in the environment.
Running after the asset classes which are doing well currently and trying to reallocate to a particular asset class, can be detrimental to one’s interest and that is why it is not recommended. For instance, let us say Girish had 50 per cent in equity and 50 per cent in debt instruments. Due to the fact that equity had not been performing well, he pulled out the money in equities in April 2011 and reallocated to debt. He is currently happy that his investment in debt is doing well. But this can provide temporary relief only and his happiness will be short lived if he does not reallocate to equity eventually. The reason: Debt investment returns hardly beat inflation and the corpus will in fact decrease in real terms, if he does not come back to equities later. Since there is the timing risk when one allocates in and out of an asset class, it is normally better to keep the allocations intact, apart from a bit of tactical allocation, from time to time.
That may look like a status quo strategy… but remember, the tortoise won eventually in the race, in that tale from Aesop’s fables. The tortoises are the ones who have the faith and patience in their strategy and stick it out. These tortoises win too.
The writer is a certified financial planner