In the first week of March a retired gentleman called
me asked what should I do with my investments in mutual funds as the market has
crashed? I just asked one question, do you need the money? He said no. My
advice was then just hold on. A few days later he again called, saying my debt
funds have also fallen and again I asked him the same question and our replies
were the same. This gentleman now was very frustrated as he was losing money
and did not know what to do. The thing is, was he really losing money or that
losing money was just in his mind. More often than not, it is usually in our
mind. The market is an unknown beast and we are trying to tame unknown and milk
it. This is our problem.
Why do we want to go into unchartered waters without
even learning the basics? My advice to such persons is, just do regular asset
allocation. If we have decided to keep 50% of our financial assets in equity
and the balance in debt, then on a regular basis just ensure that you are
maintaining that balance. This will help in lowering the risk of your
portfolio. Asset Allocation is the most boring job. We want excitement, but
this most boring job helps keep our portfolio safe. This is what most of us
want. We are ready to keep our money in fixed deposits in the name of safety,
which is also boring, then why not asset allocation with higher returns and a
little higher risk compared to Fixed Deposits.
Over a log period studies have shown that regular
rebalancing even once a year has given better returns than doing nothing.
Rebalancing is necessary because different asset classes give varying returns
over different periods of time. Because of these varying returns, the asset
allocation changes over a period of time. Regular rebalancing helps in
restoring the asset allocation and also reducing the risk. In the bargain, you
tend to book profits from the asset class which has grown and purchase at a
lower price the asset which has not grown to the same extend. Mind you, we are
not timing the market, but we are still booking profits on a regular basis.
So do not let your emotions drive your decisions, just
do regular rebalancing. If you find it difficult, just go for professional
advice.
