Boom times in Equity Markets- Invest/Stay or Exit?

July 30, 2020

As I write this, equity markets locally and globally are on fire. While things on the ground have got worst, the equity markets are rocking. This new found love with equity-oriented portfolio is driven more by the generous monetary policy being followed by most of the central banks across the globe. Interest rates have been reduced drastically (near zero in some economies) which is fueling investment in equity assets. As long as the interest rates are kept lower, equity markets will give a damn to corporate earnings.

The big question is till when the party will last?

And what should be the typical strategy of an equity investor be- invest more, withdraw or stay invested?

My guess is- best times to invest in equity portfolios for very high short-term returns are slightly behind us. Does this mean there would be a big crash? My humble answer is nobody knows. But one has to be selfish to his/her condition and act accordingly. The following points will help:

1. Maximum allocation to equity linked portfolio should not be more than 50% of one’s wealth. Investors who are looking for regular income like retirees or those having a very low risk profile should have the equity exposure limited to 25% or lower.
2. Aggressive extra investments which were planned to be done on a regular basis to benefit from the earlier lower prices can be scaled down now. These could ideally be moved to safer asset classes like fixed income debt mutual funds or Fixed Deposits based on tax efficiency.
3. Regular investments in equity investments for those financial goals which are very far (5 years and more) and those investors whose allocation to equity is much lower based on their risk profile can continue investing and benefit the fruits of long-term investing. However, avoid one-time investments.
4. Investors who have breached their equity allocation limits need to gradually scale down (exit) on a regular basis and de-risk themselves. They could also invest increment savings to safer asset classes like fixed income debt mutual funds or Fixed Deposits.
5. Exit those equity portfolios gradually which have a financial goal maturing in the next 3-5 years and move that to safer assets as mentioned earlier.
6. Non-core equity portfolios should be the first to be exited. Best time to clean up now.
7. Equity portfolios should be sufficiently diversified (not over diversified though) across styles and geography.
8. For clients who have large exposures to US Markets through technology stocks (either stock options or active purchases), the humble advice is diversify.
9. Do not expect returns of last 3-4 months to cloud your future investments.
10. Speculative transactions and day trading is a strict NO-NO.

The intention of a well-designed financial plan is to help one to reach their financial goals and not always to get highest returns. As long as we manage the risks better- returns will take care of themselves. So, a focus on asset allocation (not put all the money in one basket- spread in equity, fixed income, gold and real estate), diversification (not to have a style bias within an asset class) and lower costs would surely help.

So, go and revisit your financial plan and your overall allocation strategy. Now is the time to do it. If confused, then take the services of a fee only financial planner who can give an unbiased opinion of your condition.

Wishing you all a safe and exciting investment experience.



By Naveen Julian Rego
Naveen Julian Rego is a certified financial planner.
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Comment on this article

  • Madhan, Chennai

    Fri, Jul 31 2020

    I'm a new investor , after little bit understanding about the working procedure of MF I start investing from last 1year. I'll keep invest and stay.
    But I'm a short time profit booking in my portfolio, I invest 5000Rs. and if return over 1000rs. I'm taking back my initial about and invest in other fund, since
    I doesn't know when should I redeem my fund.
    Is that right method?

  • Rohan, Mangalore

    Fri, Jul 31 2020

    Very nice article. Very helpful. This liquidity induced rally has surprised many but the levels are much lower than those of the highs two years back. As I see only the major indices and some news based blue chips have made considerable gains. The broader market specially the mid cap and small cap where most retail investors are stuck in their investments.

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