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Changing investment strategy

Changing investment strategy

TLDR: Markets have run up, what should you do? Stop SIP? Shift to other assets, build a cash position? - Some answers below

Globally equity markets have run up quite a bit from their lows from the global financial crisis numbers. How much? By a lot.

From a low of 683 to 2943 as of 29-Apr-19

That is a very strong performance with a only a few minor blips along the way to the current value.

683 on 6-Mar-2009 to 2943 on 29-Apr-19, roughly 10 years at CAGR of 15.48% and an absolute return of 330%.

Very impressive indeed.

How does it compare to things closer to home?

Low of around 2700 to 11750 as of 30-Apr-19

2719 during March 2009 to 11748 in April 2019, a 10 year CAGR of 15.51%, or absolute return of 332%.

Definitely a nice chunk of change. I am in no way arguing that anyone could have predicted the absolute lowest point of the market and invested right at the time to get this return. But the question I see from several forums and investment circles is whether the market is too hot. What should I do with regards to my investments.

Investment strategy for overheated market

The first thing that we would want to note is to identify an overheated market. A historical P/E of the index is a good place to start as a benchmark. But you can add further market signals that you think are required to provide you a more holistic view.

Assume that all your indicators are telling you that the market is overbought, then what do you do?

  1. Do you sell?

  2. Do you stop your equity SIPs?

  3. Do you build a war chest of cash?

  4. Do you diversify to other asset classes?

Let us tackle these one at a time

1) Do you sell?

Unless you have hit the investment horizon of the items tied to specific goal (buy a house, car, dream vacation etc.) . Do not sell. There is not predicting how much longer this bull run will last. If you are saving for your retirement and you don’t plan to withdraw these funds in the next 5 years, stay invested.

2) Do you stop your equity SIPs?

The benefit of SIP or DCA is that you are accumulating your corpus one month at a time. Since there is no predicting the top or bottom of the market do not stop your SIPs. You can try my investing model to temper the purchases when the markets run up a lot.

You can try and tweak your equity to debt ratio based on your risk appetite to reduce your weightage of equity. This has two main benefits

  • You can leverage your DCA or SIP to automatically rebalance your portfolio (Maybe this deserves a post on its own)

  • You can reduce purchases of overbought assets (equity in this case)

My typical investment portfolio is 80:20 ratio leaning towards equity. Given the current market situation I have moved to a 60:40 ratio by tweaking my SIPs. I still invest the same amount every month but I have increased by debt allocation over equity.

So in other words, do not stop your SIPs. Tweak the ratios as you see fit.

3) Do you build a war chest in cash?

The concept of building up your cash war chest is very popular. Every time there is a 20% run up, I see people wanting to move to cash for the impending doom and crash.

I am not a fan of holding cash in a savings account, Time deposits (FD) especially for NRE accounts come with penalty for premature withdrawal. So I prefer to keep my money work for me. I am happy to keep a small portion for my immediate needs (Mini emergency fund) in cash in a high interest savings account. Other than that, I almost never hold cash. I use liquid funds, ultra short duration funds for emergency funds.

I hold other debt products in my SIP portfolio which I continue to build out as a war chest.

So never hold war chest in cash. Keep that invested and readily deployable. It is ok to wait for a few days when you are in a bear market to start deploying funds into equity.

4) Do you diversify to other asset classes?

Yes and No. Any successful portfolio needs to be well diversified. So you should hold various asset classes from equity to debt to real estate to precious metals. But for anyone who is serious about FIRE, equity portion of your portfolio needs to be significant. Else it is almost impossible to beat inflation.

So yes, you should diversify but over diversification doesn’t help.


So what are your thoughts? Do you have a change in strategy for an overheated market? How do you approach your SIPs? Leave your comments below.

Rebalancing your portfolio

Rebalancing your portfolio

Indian market lazy portfolio - continued

Indian market lazy portfolio - continued