An acquaintance showed me his portfolio of 10 funds. Barring three funds, all were mid or small-cap tilted. In September 2018, he stopped his SIPs into all these funds when he began to get worried about the future trajectory of the market.
Now he wants to exit all the funds and channelize the money into debt funds, with probably a small exposure to a large-cap fund. From an aggressive investor stance, he is now adopting a very conservative stance.
I spoke to two financial advisors and put down what they thought were his biggest mistakes.
Not comprehending asset allocation: Basavaraj Tonagatti of BasuNivesh
To build a portfolio without grasping the importance of asset allocation between debt and equity is a grievous error. This is the first decision that has to be made, and it must be based on the time horizon of the goal. If you fail to have this as a starting point, you end up chasing returns and fancy numbers with respect to mid and small-cap funds (without bothering to account for the actual volatility or risk involved).
When considering a time horizon, I suggest a simple strategy:
- Goal < 5 years: 100% debt
- Goal between 6-10 years: Debt to Equity should be 60:40
- Goal > 10 years: Debt to Equity should be 40:60
Once this is in place, a periodic review is fine. Don’t check your portfolio daily and then frequently change strategy in reaction to volatility in the market.
How must he rectify?
He has stated that he is now a conservative investor. Hence, as a corrective measure, he can exit these funds to ensure a reasonable asset allocation. Of course, there will be capital gains and exit load to be considered.
I would recommend a 40:60 between debt and equity. For debt, he can look at the Public Provident Fund (PPF), if the maturity matches his goal. He can also consider liquid funds or arbitrage funds. For equity, he can use stick to a large-cap index fund, a mid-cap fund, and an equity-oriented hybrid fund in the ratio of 50:30:20 (in equity part).
Being a slave to market upheavals: D Muthukrishnan of Wise Wealth Advisors
There is absolutely no need for panic. Every year cannot be 2017. Conversely, every year will not be 2018. There will be ups and downs. This is part of the terrain when investing in equity.
The problem stems from decisions not being made on solid parameters, but decisions based on speculative thoughts. Benjamin Graham wisely said, “The investor’s chief problem—and his worst enemy—is likely to be himself. In the end, how your investments behave is much less important than how you behave.”
He exited his SIP in September last year because it was unclear where the market is heading. That was not a smart move. Investors must not stop their SIPs in a bear market. As Shelby Davis once stated: “You make most of your money in a bear market, you just don’t realize it at the time.” SIPs are designed to make investors invest in bear markets, which they would otherwise never do. If not for SIPs, everyone would be chasing equities only in bull markets to their own peril.
He now wants to exit his investments in small and mid-cap funds because of an “imminent market crash”. But, no one knows whether a market crash is coming or not. And how long it would be if it comes. And the depth of the market downturn. I repeat, investment decisions should not be taken based on speculative thoughts.
If he exits his funds, he would be converting a notional loss into a permanent one.
How must he rectify?
My advice is to stay invested and not redeem. He can hold his funds for at least another 5 years. He may expect decent returns from this holding period.
I would also recommend that he restart his SIPs in a few multi-cap funds.
Also read 6 lessons for nervous investors where Sunil Jhaveri comments on the very same portfolio.
