Here are some suggestions from Dhirendra Kumar on how to navigate the irrational markets
I am a 26-year-old investor. As the markets are currently irrational, are we expecting a crash in next 6-twelve months? I have a gold and -ve beta debt fund in my portfolio to hedge the same. But in view of the current market situation, I am unsure about the proportion of gold and -ve beta bond in my portfolio.
- Anurag Patel
You are 26 years old and you have a great hypothesis. I don't understand it. I believe it is very difficult to predict what is going on, as well as the short-term direction of the market. I would like to be guided by asset allocation. Fortunately, for you Anurag, you are 26-year-old. I hope that you have a meaningful accumulation but I also think that if you're earning, saving and investing. But it may not be sizable if you have been investing for the last two-three years.
It is important for you to maximise your return when you have nothing. So, have an allocation which is suited to your requirements and the markets will turn around, whether it takes one-and-a-half years or three years, it will roar and different kinds of companies will make a big comeback and we will be on a growth path.
While investing in equity, we should not forget that it is a general bet on our economy. This ongoing crisis is holding us back and has actually destroyed our premise to our expectation or the hope that 'when will we get past this?' or 'will we be better off from here on?'. But we should at some point get beyond this and after that, whenever we get back on track, companies will prosper and start making more money and grow. A lot of fluff will be out of the market and the mortality of companies will also be good in a sense that efficient and better ones will grow. And it is capitalism and it is something which will happen. Based on the recent regulatory changes that we have seen in the last four or five years, I think we are better configured to be a capitalist society from the business point of view.
So, I would say that work on your asset allocation. Maybe if you want to be an active investor, go with the asset allocation and rebalance it more often. Have some allocation to gold and think of gold as insurance as per your premise. But don't over-engineer your portfolio. I know very simple principles that you have to remain invested in the market for the big jump, which comes with a surprise and there is absolutely no way around it. If you are looking at the market on a day-to-day basis, you are saying that the market is irrational, markets are always irrational. When the markets actually tank and go down in the dumps, it looks like the dividend yields are zooming, the world is coming to an end and all businesses will die. It is also irrationality.
Therefore, I would say that markets will remain irrational. You have to define a rational way of navigating this market and you have to base it on the things that you can control and not on the things that you see. This is because there could be absolutely no correlation. I would say that read my column 'Random patterns and equity investing' on Value Research Online. I have written about a discovery I made recently while reading a book that we try to make our assumptions about the correlation between what we think and how we behave and the actual outcome could be completely unconnected. So, read it as I think it will be an interesting one.