Should you switch out from Equity?

The answer seems obvious, isn't it? It is a typical tendency to go after the ones that give maximum returns. There is another tendency too - going after fads. Fads are ones that are temporarily popular and die down with time.

People have been now going after gold and property as these are seen giving good returns now. But, does it make sense to shift from one asset class to another, from time to time, based on the current performance?

Different asset classes have different dynamics. The performance of different asset classes at different points could be different. That is precisely why, it is best to have a diversified asset allocation, in one's investment portfolio.

Equities at this stage are performing badly. gold and debt are doing well. So, if one has allocation to these, the portfolio return would still not suffer much. Many have raised their allocation to gold and it is going up, simply because this has now become a world-wide phenomenon. Investors have to realize that Gold has offered single digit return over 20 year plus periods. Due to the huge risk perception in the past few years, it is doing well as it is seen as a safe haven asset. While this might be true, one should not be carried away by the returns it has given this year.

Switching from Equity to Gold or debt to a certain extent, makes sense. That is a tactical allocation. Switching entirely from equity assets into Gold/ property/ debt, will be a dumb thing to do. This has to be done in moderation. For instance, if a person currently has 65% in Equity and wants to bring it down to 50% and shift it to Gold/ debt, it makes sense. It however does not make sense, if the same person wants to exit equity completely and wants to invest in other asset classes.

The reason is that Equity has given very good returns over long periods. The past four years have been bad for equity markets.  That does not mean that this asset class has lost its potential to offer excellent returns, overtime. Hence, it makes sense to keep allocation in Equity.

Looked at it one way, it makes eminent sense to invest in Equity now as the prices are low and when the stock market does bounce back, the investments made now will give the best returns. Those who believe in the fundamentals and have conviction should stay invested and even invest more.

For others who want to tactically reallocate, there are two choices before them -

1. Do it themselves by pulling out money from equities and putting them into gold or debt or any other

2. Look at Asset allocation funds which allocate between debt/ equity/ gold etc.

Former calls for some work from the side of the investor. In the latter, the fund manager takes calls to invest in the appropriate asset classes, based on their prognosis for the various assets, but the allocation may not be the one that you may want.

The first option is a good choice for those who are willing to do some homework or those who have professional assistance for it. For those who do not want much hassle, the asset allocation funds should do.

But, whichever it is, pulling out money from equities to a major extent or completely, would be the dumbest thing to do. In hindsight, you will curse yourself for being a double chump for pulling out the money from the market at this time and you would want to kick yourself for not having the foresight to have put more money in equities at this point.

Right now, I read somewhere that only 4% of the retail investors' money is in equities. I suspect there will be lot of kicking in the future!

-Suresh Sadagopan

The author is a Principal Financial Planner at Ladder7 Financial Advisories.