The importance of automating investing rules At such times, you should periodically rebalance your portfolio by selling a portion of your equity and reallocating the funds to fixed income. This maintains the desired balance. Conversely, when equity underperforms, its advisable to sell some fixed-income assets and invest in equity
Dhirendra Kumar
CEO, Value Research
In the midst of the general meltdown of Zee Entertainment, I noticed an interesting tweet by Fund Manager Samir Arora. Arora, who now runs his own fund company, Helios, was the fund manager for Alliance Mutual Fund in the 1998-2000 bull run. Arora had posted a screenshot of the Zee Entertainment stock price chart from 25 years ago, from January 1998 to April 2000. During this period, the Zee stock went up from Rs.4.58 to a peak of about Rs.778 (adjusted for a split) on 24 February 2000, and then collapsed. The tweet read, ‘Those were the days... it was the top holding in Alliance Funds through this bull run.’
In response to the tweet, someone asked when and why Alliance had sold the fund. Arora replied that they had to sell every day for two years because the stock comprised 10% of their holding, which was the limit for maximum exposure of a mutual fund in a single stock. Eventually, when the stock was falling hard, they got out at about 30% dip from the peak. Remember, this stock went up 16,800% during that period.
What happened to Zee is uninteresting today because such peaks and valleys are seen in the price history of many stocks. The interesting part, which is relevant to all of us who invest in stocks, is that a simple rule, that enforced diversification and asset rebalancing, was instrumental in the fund doing very well out of the stock. When an investment is going up sharply, the natural tendency of an investor is to hold on to it and, perhaps, invest even more. This feels like the best possible option to maximise returns. However, in the excitement of daily rise in prices, it’s easy to forget the basic principles of investing.
Even though the above example involves a single stock, it is a good way to understand asset allocation and rebalancing in stocks and fixed income as asset classes. If you are a saver or casual investor, you may not be familiar with asset allocation and asset rebalancing. You might think these are complicated concepts and not something you need to worry about. However, these concepts are very straightforward and helpful. Asset rebalancing means adjusting your portfolio periodically to maintain the intended asset allocation. .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:10px;font-weight:500;line-height:18px;} #sr_widget .sr_desc{margin:0 auto 0;} #sr_widget .sr_desc{color: #024d99;}
Investors looking for twin engines of quality and growth.
Typically, equity grows faster than fixed income. During such times, you should periodically rebalance your portfolio by selling a portion of your equity investments and reallocating the funds to fixed income. This maintains the desired balance. Conversely, when equity underperforms, it’s advisable to sell some fixed-income assets and invest in equity. This approach effectively captures the essence of realising profits and investing in undervalued assets. Over time, markets tend to revert to their mean, ensuring that when equity is underperforming, you’ve already secured some profits in a safer investment.
The important point that the above story drives home is that this approach has to be automated and rule-driven; it has to be a process, not a subjective decision. If left to a subjective opinion, it will go wrong exactly when it is needed. The impact of this strategy is almost like magic. It reduces volatility, a major equity concern, while the returns remain robust. However, it requires too much activity and is not tax-efficient. Therefore, the most viable solution for investors is using hybrid equity-debt funds. The reallocation between equity and debt is managed internally in these funds so that you don’t face any tax implications until you withdraw the funds.
However, today’s main takeaway is not just asset allocation and asset rebalancing, but also how the basic principles of investing should be pre-set and applied via some process. The human temptation to get influenced by immediate events needs to be controlled.
(The Author is CEO, VALUE RESEARCH)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
This story originally appeared on: India Times - Author:Faqs of Insurances
