Game of Investment Requires You to Play on the Front Foot Sometimes

Few days back one investor came to me through a reference. He had been taking advisory services  from one of the renowned advisors in Delhi but not satisfied with the result. On such occasions, usually I don’t change the portfolio too much even after the change of advisory because there usually is not much to change.

But in this case, I really felt for the client. There were few NFOs (New fund offer) and fancy thematic funds. One more glaring thing that I noticed is that during covid, the advisor shifted substantial amount from equity to debt and started systematic transfer plans (STPs) back to equity funds. So, the client exited from equities virtually at the bottom and then entered in equities again periodically through STP in the next 3 years. This exercise resulted in exiting from the equity funds almost at the bottom and taking entry again at the rising market.

There was a different strategy we followed during the same time. We saw that in March-April 2020, the asset allocation of a typical client was down by almost 5-10% compared to his/her February 2020 asset allocation. We, like everyone else in the world, had no clue what would happen in the coming days. Situation was scary on the health front as well as on the financial arena.  Experts were predicting further huge downside for the equity market. At that time, we had decided to stick with our discipline of time tested asset allocation formula. So we have written to all our clients to rebalance their asset allocation and get it back to February 2020 level. Since Equity allocation had gone down, we advised them to switch from debt to equity funds in March and April 2020. In these 3 years, equity market has almost doubled and resulted in superlative return for the investors. More so  for those who entered at almost the bottom of the market due to asset allocation rebalancing exercise.

Now look at the performance difference of the strategy of that advisor, vis a vis the asset allocation rebalancing approach we followed-

1) Total return on equity funds on advisor’s portfolio generated paltry 20% in the last 3 years.

2) The asset allocation rebalancing strategy we followed generated a total return of 80%-90% in the last 3 years for equity segment.

In the investment world, it pays sometimes to play on the front foot rather than being timid. Covid like situations are opportunities disguised as crises in the investment world. You have to capitalise such situations. No, I am not saying to throw caution out of the window. All I am saying is to remain true to the strategy of asset allocation. We have not switched the entire amount from debt to equity even though in hindsight it would have been fabulous to do so. All we did was to remain committed to the time tested success of the asset allocation model. This has given us enough conviction to advise our clients to rebalance their portfolios.

Taking calculated risk pays a rich dividend in every walk of life including in investments. Important thing is to have a solid model which acts like an anchor during your risk taking venture. In the investment field, asset allocation is one such anchor.

You just can’t hope to excel by being weak-kneed and following the herd mentality. You have to take some calculated risk as well.

Manoj Pandey

CFP