A client said – I understand market valuations are expensive but it doesn’t seem that it will correct much. Everything is positive – India’s growth story, expected cut in interest rates, and strong domestic inflows. There is nothing to worry about.
The fundamental driver of market peaks and exorbitant valuations is the perception that there is nothing to worry about – there is no investment risk. Certainly, there are times when there are no known risks but many unknown risks are lurking around. Many are shocked when any of these risks raises its ugly head.
During the IT bubble in 2000, the majority believed that nothing could go wrong and we are entering a new millennium. Before the crash of the subprime bubble, the market’s earnings were growing at 24% YoY over the last 3-4 years. Nothing seemed to be wrong. When the euphoria ebbed, markets corrected by more than 57% from the peak of the IT bubble and 65% from the peak of the subprime bubble. Are we in a bubble right now? The majority believed they were not in the bubble during the IT & subprime boom. We only understand we were in the bubble after it burst.
Should one worry about an impending fall? Certainly not if you are sticking to your asset allocation. Expensive markets can continue to stay expensive or become more expensive for a very long period. But that shouldn’t sway you from carefully designed asset allocation suitable to your risk and returns objective. The biggest mistake many investors make is not reducing equity exposure in their portfolio as per their asset allocation plan. On the contrary, they feel like money is wasted in debt allocation and should be allocated more to equity. They ignore the fact that debt in the portfolio reduces the risk and acts as a provision to take advantage of market corrections.
One lesson I have learned in my career of 18 years and from reading wise & successful investors is that being disciplined is the most important trait in investments. That one thing ensures investment success in the long term.
Equity markets are governed by the law of mean reversion. The timing of these reversions can’t be predicted. Therefore, sticking to your asset allocation is the only reliable strategy to avoid shocks that can impact your peace of mind and cut short your compounding journey. Your ability to stay disciplined with asset allocation will determine your long-term investment success.
Originally posted on LinkedIn: www.linkedin.com/sumitduseja
Truemind Capital is a SEBI Registered Investment Management & Personal Finance Advisory platform. You can write to us at connect@truemindcapital.com or call us at 9999505324.
