Bear markets have never worried SANKARAN NAREN, the executive director and chief investor officer at ICICI Prudential Mutual Fund. He has always viewed them as phenomenal times to make money. It is bull markets that he fears; when investors throw caution to the wind and forget about that pesky thing called risk.
He shared with me a simple and effective strategy that investors can follow so as not to lose their shirts seeking thrills in such a market. He has given it the acronym ABCDEF to enable convenient recollection.
You can also watch the video here.
A = Asset Allocation
Portfolios must rest on the bedrock of asset allocation. I cannot overemphasize how crucial this is. Give careful thought as to the weightage equity, debt and gold must have in your portfolio, and stay within those boundaries. Don’t let the bull market lure you into going all in, as far as equity is concerned.
An ongoing bull market makes investor forget about asset allocation. But, if you want to make money over the next 5 years, you have to pay attention to it. Those who were careful about their asset allocation in earlier bull markets, such as 1994, 1999 or 2007, were the eventual winners.
B = Balanced Approach (and Booster STP)
Instead of chasing what has run up, a balanced approach would entail investing in what has not done well on a 1-year basis. Last year, it would have meant investing in mid and small caps when they were hit. This year, it would mean investing in the Global Advantage Fund or US Bluechip Equity.
Let me give you some context. In 1999, investors only looked at Technology, Media and Telecom. It was as if other sectors ceased to exist. At that time, I used to run a stock brokerage in Chennai, and would see investors flock to stocks such as Himachal Futuristic, Global Telesystems, DSQ Software, and Pentamedia. Old economy stocks that were cheap and offered great bargains were ignored.
In 2007, Infrastructure stocks were chased. I used to run two funds - the Infrastructure Fund and Value Discovery. The latter was facing redemptions while the former was flushed with inflows. In fact, Infrastructure Equity Fund was the largest fund in our equity basket.
Have a balanced perspective; what has run up tremendously is not the smartest place to be parking your money.
I would also request investors to look at a Booster STP, which allows the money to get invested when the market falls.
(A regular Systematic Transfer Plan (STP) would entail that you invest at market highs, An STP, called Booster STP, allows unit holders to opt for transfer of variable amounts from one source scheme to a designated target scheme at defined intervals, based on market valuations.)
C = Conservative
In big bull markets, it helps to stay conservative. Being conservative, when the world screams aggressive, will benefit you. Being conservative when the market is high will make you a gainer, not a loser.
What do I mean by being conservative? I reiterate, stick to asset allocation and have a balanced approach. Don’t buy stocks whose businesses you don’t understand. Don’t buy stocks with no earnings. No quick rich schemes. Be very careful with options trading. Be very careful with derivatives trading. No leverage. The open interest in stock futures today is Rs 2 lakh crores, which is an indicator that leverage in the system is very high. Stay away from leverage at the top of the market. A few weeks ago, the behaviour in select mid cap stocks was just a function of the leverage that existed there.
Be conservative at the top of the market. Be aggressive at the bottom of the market. Don’t inverse this behaviour.
D = Debt
Invest in debt. Debt is a capital protection tool, not a return tool. You won’t lose money investing in a liquid fund or an overnight fund. Even in other debt funds such as floating rate, ultra-short term, medium term, and dynamic bond fund, the chances of losing money are slim.
The aim is not always to make big money, it is to protect what you have. There are times in the market cycle when you invest to be cautious. The returns will be low or moderate, but capital protection takes dominance.
Investors who invested in debt in 2017, 2018 and 2019, specially in certain categories, and then switched to equity in the stock market crash of 2020 would have gained a lot. In March 2020, investors invested in equity to make money. Now, investors should invest in debt to protect their money.
E = Enjoyment (and Equity Savings and Equity Arbitrage)
What is the goal of investing, if it is not some amount of enjoyment? It is important to enjoy the money you make.
Equity is not a low risk category, but Equity Savings and Equity Arbitrage are two categories that can be considered at this point in time. They are low risk equity categories.
F = Fund of Funds (FoF)
If investing confuses you, go for a FoF and leave the decision to the AMC. We have numerous FoF strategies – Debt FoF, Global Advantage FoF, Asset Allocator FoF, Thematic FoF, Passive Strategy FoF that invests in ETFs, India Equity FoF that invests in schemes of other AMCs.
G = Global Central Bank-created bull run
There are many similarities with the previous bull runs of 1992, 1994, 1999 and 2007 - IPO frenzy, elevated equity market valuations across the world, and spiked retail investor interest.
Having said that, this is a global central bank fuelled bull market.
Earlier bull runs were driven by investors. In fact, during those periods, central banks were increasing rates to cool down the markets. This time it is different. Since 2008, central banks have put $25,000 billion to work and continue to print money. It is this relentless printing of money that has made equity stand out in terms of extremely high valuations, and made other investments lose their appeal. Interest rates have dropped to zero or near zero levels is many parts of the world. Debt is unattractive. Yet, there is no global equity market that is cheap or not scaled new highs.
If central banks keep putting money into the markets, they will rise. If they don’t increase interest rates despite inflation it will help the markets and increase inflation further. If they keep calling inflation transient, we will just have higher asset prices.
My sincere request to investors is to keep in mind what I have said - ABCDEFG. It will ensure that you turn out to be a gainer in the next three years.
You can also watch the above interaction on video.
Larissa Fernand is Senior Editor at Morningstar India. You can follow her on Twitter.