The simplest way of incorporating market timing into investment strategies is to have the right mix of assets – stocks, cash, bonds and other assets – in your portfolio, depending on your risk profile and time horizon. This is critical. Timing your investments is not usually a sound investment strategy. The right thing is to diversify your money across a range of asset classes and to ride out the performance troughs in each market. By placing your money in a number of asset classes, the good returns you receive from one investment in a certain time period can help offset the poor performance of another.
We often emphasize investors to maintain a portfolio that is well-diversified across and within the asset classes. But when the equity markets are surging, making and breaking record highs, the only investment consideration is for equities. Even the most risk averse investor’s portfolio will be biased towards equities. Conversely, when the markets do not show much action and remain mostly volatile and bearish everyone wants to get out from equities and in times like these people come to us and say, ‘now I understand why you want us to invest in bonds and other asset classes’.
After the correct asset allocation has been decided upon, you need to diversify your investments by investing in a range of regions, sectors and industries and thereafter it is very important that you monitor and rebalance your portfolio regularly. Rebalancing your portfolio is crucial – when the returns from the equity side of portfolio increase causing the equity percentage in your portfolio to go up, you can rebalance your portfolio, to the earlier determined asset allocation based on your need and risk profile, and reduce your equity holdings. So when the markets tumble, you will realize that you have already taken the profits and invested it in other safe assets. Similarly, when the equity markets tumble you may find the equity part of your portfolio falling below the allotted levels and hence increasing your equity holdings will optimally balance your portfolio.
If your asset allocation is correct and your portfolio is properly diversified, patience is the only remaining ingredient for success. All asset classes experience market downturns, but given time, shares, property, gold and bonds will reward investors who are prepared to sit it out. As we say: it is not timing the market, but time in the market that counts. Trying to time the market is dangerous to your long-term financial health.
Now the next question is how much allocation should I give to each asset class? This will depend on a lot of factors including your age, your financial liabilities, your risk taking capacity and your lige goals. With the help of a good financial planner you will be able to set up a proper asset allocation plan. To contact Arihant’s advisor to help you set up a proper investment plan, email us at email@example.com.