Keep the Cash
We wish we had seen it coming. The rally after the fall. If we did we could have made a ton of money with the markets having more than doubled since its lows of 2008. At the time of the huge correction the investing community was divided into three:
1 .The Cynics - These guys had resources to invest and take advantage of cheap valuations. They however believed that the market could see further downside and there was no recovery in a long long time. They probably had lost money already with existing investments and were unwilling to commit more.
2.The broke bunnies - These were investors who lost a great deal of their wealth in the stock correction, had no cash in hand or other assets that they could liquidate to buy stocks at the huge discounts they were available at.
3. The gold hunters - They were people with the cash and recognized deep value in the markets. They jumped in to take advantage of falling prices. The great Indian stock sale was too good to be true and our hunters lapped up quality companies available at great discounts.
While not much can be done about the cynics, you could avoid being a broke bunny. All you need to do is to ensure that you keep some part of your assets allocated in liquid /debt based investments. A plain mechanical asset allocation plan will help. For example if you have a 50:50 plan, which means a 50% equity and 50% debt allocation, every half year you could review your allocation and re-balance your portfolio. Since emotional reactions to market movements are not involved, you will take the rational decision of selling when markets are rising and buying when markets are correcting.
Let's learn lessons from the rally of 2007 and the following crash of 2008. Markets were rising by a few hundred points almost daily. Everyday a new set of stocks was hitting 20% upper circuits. Debt at that time was offering a mere 8-9% which was too low by equity standards. In the pursuit of high returns broke bunnies put all their savings into equity investments only to be severely punished in the following crash. It was even more frustrating that there was no liquidity available to buy into the correction. It would have been, in retrospect, prudent to park money in debt and go bargain hunting in 2008.
Equity investments are about opportunity and opportunities do not coming knocking every day. There are periods that offer great value deals, there are periods that require sitting on the fence and taking no action, and there are periods which require you to sell as valuations go into bubble territory. This means that all stocks are not right to buy at all times.
The pursuit of high returns at all times is a fallacy. It will probably lead to bad investment decisions and the purchase of overpriced assets. When valuations are unattractive it is a good idea to keep your investments temporarily in low yield debt investments till you find a great equity investment and a good price. If you buy right, the returns from a good investment will more than compensate you for the low returns earned while parking money in debt.
For the cynics who missed the whole rally, the best way to participate further is by going in for stock specific picks that offer value or take the SIP route. Bargain hunting is as tough as it gets and it will be nice to hire a good portfolio manager who is not averse to keeping cash (liquid debt investments) till valuations look attractive again. In times when bargains are available, cash will be your best friend. So do keep some by your side and you can be a gold hunter too.
1 .The Cynics - These guys had resources to invest and take advantage of cheap valuations. They however believed that the market could see further downside and there was no recovery in a long long time. They probably had lost money already with existing investments and were unwilling to commit more.
2.The broke bunnies - These were investors who lost a great deal of their wealth in the stock correction, had no cash in hand or other assets that they could liquidate to buy stocks at the huge discounts they were available at.
3. The gold hunters - They were people with the cash and recognized deep value in the markets. They jumped in to take advantage of falling prices. The great Indian stock sale was too good to be true and our hunters lapped up quality companies available at great discounts.
While not much can be done about the cynics, you could avoid being a broke bunny. All you need to do is to ensure that you keep some part of your assets allocated in liquid /debt based investments. A plain mechanical asset allocation plan will help. For example if you have a 50:50 plan, which means a 50% equity and 50% debt allocation, every half year you could review your allocation and re-balance your portfolio. Since emotional reactions to market movements are not involved, you will take the rational decision of selling when markets are rising and buying when markets are correcting.
Let's learn lessons from the rally of 2007 and the following crash of 2008. Markets were rising by a few hundred points almost daily. Everyday a new set of stocks was hitting 20% upper circuits. Debt at that time was offering a mere 8-9% which was too low by equity standards. In the pursuit of high returns broke bunnies put all their savings into equity investments only to be severely punished in the following crash. It was even more frustrating that there was no liquidity available to buy into the correction. It would have been, in retrospect, prudent to park money in debt and go bargain hunting in 2008.
Equity investments are about opportunity and opportunities do not coming knocking every day. There are periods that offer great value deals, there are periods that require sitting on the fence and taking no action, and there are periods which require you to sell as valuations go into bubble territory. This means that all stocks are not right to buy at all times.
The pursuit of high returns at all times is a fallacy. It will probably lead to bad investment decisions and the purchase of overpriced assets. When valuations are unattractive it is a good idea to keep your investments temporarily in low yield debt investments till you find a great equity investment and a good price. If you buy right, the returns from a good investment will more than compensate you for the low returns earned while parking money in debt.
For the cynics who missed the whole rally, the best way to participate further is by going in for stock specific picks that offer value or take the SIP route. Bargain hunting is as tough as it gets and it will be nice to hire a good portfolio manager who is not averse to keeping cash (liquid debt investments) till valuations look attractive again. In times when bargains are available, cash will be your best friend. So do keep some by your side and you can be a gold hunter too.
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