Post-Diwali 2010, the euphoria was still being carried into 2011. However, as we enter 2012, the gloom, despair and frustration are palpable. The use of tools, such as asset allocation and portfolio rebalancing, could never have been used more frequently. With the benefit of the events of 2008-09, a lot more investors would have made informed decisions in protecting their capital.
So, how would 2012 be different from the year gone by? I have used the tools of asset allocation and portfolio rebalancing, choice of financial products and asset classes in the investment portfolio to ensure that capital is protected and inflation-beating returns are generated. And yes, this is no thumb rule and the investment rationale for each investor will vary.
Investment has to be with a time horizon, with a goal, taking into account your liquidity needs, in accordance with your risk profile. This mantra needs to be adhered to every single time you make an investment decision.
With the above rationale, let us look at the current investment landscape. The Indian economy is limping (not to say about the world economy). With elections in the some of the biggest states this year and the coalition politics at the Centre taking its toll on the political masters, the initiatives for growth will be more of an aberration rather than the norm.
The method
Let us now break the year into four quarters. The adage ?cash is king? rules the roost today, and I would actually recommend being overweight on debt products as an asset class. With interest rates probably at their peak, for short-term funds to be able to generate double-digit returns, the strategy for the first quarter needs to be in place. Again, this is an appropriate time to invest part of the portfolio in the longer-term (1-2 years) debt products, which should generate a double-digit return. For risk-takers, investing in gilt products before the lowering of interest rates can also generate double-digit returns. Investing short-term is also for the aggressive investor who would want to invest in equity, if the market improves.
The first quarter of 2012 would also give an inkling of the direction the Reserve Bank of India takes on interest rates. If food inflation goes down and interest rates are lowered, the cost of capital also gets reduced. This would, in turn, give a signal to reallocate a portion of the portfolio back into equity. At the same time, more information on the European crisis will flow in, which will give direction, and also if foreign institutional investors are going to bring back funds. If the scenario does not change, the strategy of the first quarter will continue to prevail.
What about investing in precious metals, especially gold? Gold has retreated by more than 10% from its high. Purely from the point of view of an asset class holding, a 5-10% exposure in this metal is recommended. Investment in this asset class is recommended with a time horizon greater than 2-3 years. Again, staggered purchases is the recommended approach.
Patience is the key. What has generally been noticed is that whenever you invest for a longer-term horizon in equity, be it mutual funds or direct equity, the moment the portfolio is in the red, investors start feeling the pinch. Investment in equity is akin to investment in your own business. If due diligence has been undertaken before the investment process, the need to revisit the investment decision should arise only in case of corporate governance issues or if the business prospects have changed. With prices of most scrips beaten down, you should start tracking the prices and start taking exposure in a staggered manner. The question is, when should you start taking the exposure? If only the answer was as simple. I would say that on every 10% fall in price, review if the stock is at the price you want to buy and, then, go in for the purchase. At the same time, I would also recommend that you set a target price at which you would like to exit. And follow the process diligently. ?Buy and hold? is a good strategy to have in a stable environment, not when the markets are volatile.
Now that the strategy for the first two quarters are in place, what should be the strategy for rest of the year? The inputs would come from the then prevailing economic environment. As said earlier, patience is the key. That?s the time when portfolio rebalancing will come into play (it can also be earlier or later, the key being asset allocation strategy.) If the economic environment does not change and the European financial crisis does not improve much, being overweight in debt instruments would be the chosen course of action. Investing, besides being driven by earlier mentioned factors, is also psychological. You are driven more by the investments effected by your friends, colleagues, peers or relatives. One takes comfort in a herd and this gives comfort to the investor. It?s time you get out of this bias this year. Invest based on your goals and in products you understand, which are in line with your risk profile and your requirements. Contrarian investing could hold the key.
Conclusion
The more the things change, the more they remain the same. Across all periods, the basics of investing has not changed. Only the application of the investment principles have become more active. Treading with caution is what is recommended. Using the tools of portfolio rebalancing and reviewing the portfolio every quarter should be mandatory. Remember, at the end of the day, it is your money and no one can handle it better than you. Your financial advisor is like Krishna and you are Arjuna, who makes the hit. The aim should be to protect the capital and generate inflation-beating returns ? the mantra of 2012.
n The writer is founder and managing partner Zeus WealthWays LLP