Your Money: Steps to building an all-weather portfolio

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October 27, 2021 1:15 AM

Timing the entry in each of the asset classes is an impossible task. So, investors must have an asset allocation in place.

This story has been repeated time and again in the history of investing and history has typically a habit of repeating.

Change is the only constant and if you add consistency to the constant, you have a winner in hand. Over the years, the options for investors to choose the investment instruments have only multiplied. From simple fixed income instruments to mutual funds to derivatives to crypto currencies, one is spoilt for choices and this multiplicity of choice does confuse investors.

Price of asset classes
What we have observed over the years is that the price of the asset classes moves in cycles. At a certain time you have commodity prices on the rise, at other times we have the gold prices surging and at other times, oil prices are on the boil. Bond and equity prices have their cycles. Timing the entry in each of the asset classes is an impossible task. So, investors must have an asset allocation in place.

Let us consider the equity markets, which have been on a roll. Since March last year, when equity prices went south as if there was no tomorrow, the quick u-turn over the next quarters have seen investors’ wealth soar. Well, that’s not for all. There are many who have not seen the same story for their investments.

One of the most important things for all investors is to take cognisance , besides the investment return , is the cash flow needs. Besides return, you should also be able to use the money when you need it the most. The returns today reflected in the portfolio are all paper returns. And as a prudent investor, one should not go overboard and gloat. At the same time, have an asset allocation in place at all times.

Equity gains momentum
Over the past 18 months, the acceptance of equity as an asset class has slowly gained momentum. This is a good beginning in the financialisation of the ecosystem among the investors in India. In all of this cacophony, how can an all-weather portfolio be constructed with stocks not being revisited frequently? This does not mean a buy and hold forever method.

Portfolio construction is the key and timing the market is not the option, but time in the market. Keep your eyes and ears open and you too can construct a portfolio. Look around and see what are the various items you use everyday. Choose one or two companies from each sector, look at how they have performed over multiple periods of times ( it can be over 10 years also and in case of new-age companies in sectors like platforms, one needs to look at the current growth and financials, as always).

Go for stock SIPs
With this as the background, we can construct a portfolio not exceeding 10 stocks, in the top 200 stocks of the indices. You need to have a process in place, to ensure that you do not frequently trade or swap stocks based on the cycles in the ecosystem. You will be pleasantly surprised to have a look at the findings and the portfolio value.
Over every period of time, you will observe that more often than not, the portfolio returns would have beaten the benchmark indices. As an investor, we tend to overestimate the returns over a short period of time and underestimate the returns over longer periods of time. This story has been repeated time and again in the history of investing and history has typically a habit of repeating.

The writer is managing partner, BellWether Associates

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