As I expect returns from markets to be moderate this year, should I stop some SIPs and book profits?
Investors should ideally follow an asset allocation-based approach (mix of equity, debt, commodities, real estate, etc.) for investing towards one’s goal. For effective diversification, one should diversify across different asset classes that respond differently to the same set of economic drivers which helps to lower the overall portfolio risk. For instance, at the onset of the pandemic in early 2020 equity markets globally corrected sharply due to significant economic uncertainty. During this period, gold & fixed income were stable and outperformed equities. While fixed-income lends stability to the portfolio, equities play a crucial role in wealth generation over the long run with a potential to deliver superior inflation-adjusted returns compared to fixed-income. Longer the investment horizon and high risk appetite, higher can be the allocation to riskier asset classes such as equity.
A look at the historical index growth of the broader equity market index (S&P BSE 500) shows that markets have scaled higher peaks through time responding to drivers such as earnings growth and change in valuations. Over long horizons (10+ years), equities can be expected to deliver around 4-5% over the long-run inflation rate. Withdrawing any corpus would lower your portfolio value to the extent of the amount withdrawn, and you might also lose out on any subsequent gains on the withdrawn corpus that would have accrued till the end of your investment horizon. The withdrawals defeat the purpose of investing which is to generate wealth over the long-term. Investors should stick to their long-term strategic asset-allocation which in turn depends on their risk appetite (ability and willingness to take risk) and not try to time the markets. You can consider re-balancing your asset-allocation back to your recommended long-term asset allocation in case of any significant drift due to the recent sharp uptick in equity markets, say if you are targeting an allocation of 70% equity and 30% debt and due to the strong equity rally the allocation in your portfolio has changed to 75:25. You could reduce equity allocation and bring it back to 70:30.
The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to firstname.lastname@example.org