Smart Investing: Asset allocation in times of coronavirus

March 23, 2020 1:00 AM

Stick to asset allocation matrix, take regular profits and go for bottom fishing in select stocks/ MF schemes in these turbulent times

Due to such sharp falls in the market, financial planning goals go for a toss for many. Due to such sharp falls in the market, financial planning goals go for a toss for many.

By Deepak Jasani

The last few months have seen the stock markets across the globe being impacted by the spreading coronavirus. In times of such a pandemic the general tendency of investors is capital preservation and preference for safe havens like gold and government securities.

Due to such sharp falls in the market, financial planning goals go for a toss for many. Investors who cannot take such volatility tend to exit the market. Some discontinue their SIPs in mutual funds and fail to take benefit of lower prices. Liquidity becomes tighter and default by many corporates aggravates the situation and NAVs of debt mutual funds also fall.

Common mistake of investors
In such times investors tend to make some mistakes which are better avoided.

Withdrawing funds: The general nature of market is to be volatile. But they have bounced back from every fall (though individual stocks may not do that). So do not withdraw your investment due to temporary falls in the market but exit when the market valuations are bubbly or there is a negative development in individual stock.

Trying to catch the bottom: Nobody knows where the bottom is as the markets tend to be irrational in such a situation.

Impatience: Patience is one of the most important attributes in stock market investing. One needs to give time to good stocks/MF scheme NAV to grow. One needs to stick to the investment horizon and purpose of investment.

Buying more to average: In a falling market, investors tend to purchase more at discounted rates only to average their costs. Just because you had purchased the stocks at a higher price before, avoid doing so unless you are sure that the original story due to which you bought it at the first stage is still in force.

Falling for confirmation bias: Investors tend to fall in love with their stocks/MF holdings and keep hoping that their prices will bounce back in futures. When stocks/MF scheme NAV go into a tailspin, investors start devouring investment news and research reports. But they also seek information or signals which support their beliefs and tend to ignore matter that refutes their original thesis.

Asset allocation and review
Asset allocation is the process of deciding how much money to allocate across different asset categories such as equity, debt, gold, real estate, cash, etc., with the objective to minimise volatility and maximise returns. It is the greatest influencing factor in total portfolio performance, especially over long periods of time. Irrespective of political developments or international happenings, one must not go overboard on any asset class and stick to their suggested asset allocation.

Different asset class moves in different directions. With the exception of hindsight, no one knows exactly when an asset class could rise or fall sharply over a period of time. Therefore it is important to review your asset allocation at regular intervals (say quarterly or half yearly) to rebalance the portfolio. For eg; if equity allocation rises due to an increase in stock prices/MF Scheme NAV, it should be brought down to its original levels. This approach helps to reduce risk in the portfolio.

Whether an investor is fully invested into stocks/MF schemes or has a low investment portfolio, the decision to add more to equities or exit from equities would depend upon several factors, including proximity to retirement, tolerance for risk, skill and experience with stock analysis and comparision of current portfolio with intended asset allocation.

Sticking to asset allocation matrix, taking regular profits and doing bottom fishing in select stocks/mutual fund schemes, staying away from most media coverage (except few dependable ones) and building your own stock/mutual fund analysis and money management skills will help investors ride out turbulent times like the current one.

The writer is head, Retail Research, HDFC Securities

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