Markets Down! Is It The Best Time To Invest?
Markets are down. Is this the best time to invest.
The answer is, – ‘it depends’
It depends on what you are investing for and how you have planned for it.
As the popular quote goes, the best time to invest was 10 years ago and the next best time is right now.
Sitting on cash and waiting for the right opportunity to invest in the market is a foolhardy game. There is no right time.
The only thing is the right risk profile, based on how you see things.
If you are looking at a longer term horizon and don’t lose sleep over volatility then please go ahead and invest.
Of course, before investing you need to have a plan. In this space, it is an asset allocation plan. It is not complex. At the simplest level it is about how much money you want to put in to equity and how much in to debt.
Does Asset Allocation make a difference ?
Yes, but let’s look at some numbers to assure ourselves that it does.
Asset allocation makes the most difference in a volatile market where returns swing one way and then another.
It just so happens that we have seen some serious swings over the last few years.
Why not look at a scenario ….
We have two investors:
1. Smarty Pants, the asset allocation investor.
and
2. Harfan Maula, the know it all ‘timer’ of markets.
- They both entered the market in 2017 with ₹20,00,000.
- Smarty decided to do an allocation of 50% equity, 40% debt and 10% gold.
- Harfan being the know-it-all timer of markets decided to play it by ear.
- For the sake of simplicity we will assume equity as the Nifty index and debt as say Axis short term debt fund. Gold will be pegged to the HDFC Gold ETF.
- Smarty does an annual rebalancing of his portfolio. He sticks to the 50:40:10 ratio.
Harfan started with an asset allocation similar to Smarty. However, whenever he saw big returns in one asset class he decided to follow the returns.
From this illustration we can see that Smarty achieved an annual return of 14% vs Harfan getting a return of 10%. This is just a simple 5 year illustration and it does not include taxes and transaction costs.
The point is to drive home the fact that asset allocation works in the long run. It works especially well if you are caught in a choppy market.
Plan your asset allocation and stick to it.
You can find plenty of very good articles on asset allocation across the web – here are a couple that are a good place to start
Capitalmind – this is a good detailed article in two parts
Investopedia also has a good article
Now that you know more about asset allocation, it is time to get down to it.
Once you know what your asset allocation is, then it is easy enough for you to know when to invest in equity.
Ok, that’s a lot of information, what have I done about the current dip?
The Nifty PE ratio is back to the March/April 2020 levels – close to 21. March 2021 had gotten all the way up to 40 before the markets started correcting. Every Month has seen a gentle drop in the PE ratio of Nifty all the way down to just below 20 at the end of June. (only two months Sept and Oct ’21 did not have drops, but the trend continues).
So, I am nibbling chunks of the index on a regular basis.
(that works for me, please figure out what works for you)
You can look up this post on which stock to buy and of course always refer to the very basics.
Summary:
- Focus on your asset allocation
- Asset allocation is the best way to deal with market volatility
- Use market opportunities to correct your asset allocation
- In the long run asset allocation works, because there will usually be a few downturns in the market
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.
