Instead of getting carried away with market euphoria & market despondency, if we sensitise our Investors to the following market signals (even before on boarding them into Investment Process); not only will we able to manage their emotions better but help them in right way of thinking & investing.
What are these market signals?
Red Zone is the most expensive zone, Yellow Zone is Reasonable Valuation Zone & Green Zone is the least Expensive Zone. Ideally, Investors should invest maximum in Green Zone, less in Yellow Zone & maybe exit in the Red Zone.
However, shockingly, only 1% of Investors have invested in the Green Zone & 80% of Investors have invested in the Red Zone.
Naturally their experience of investing in Equity as an asset class has rarely been good. Following is the data of investments in NIFTY/Sensex in different zones from 2000 to 2017 & if held for 5 years from the point of their investments:
As can be seen from above, it simply does not make sense of investing in the Red Zone.
Since, we are aware of this as an irrational behaviour of the investors; why don’t we guide them on the right path by doing just the reverse of what they have been doing so far i.e. Disinvest in the Red Zone & Invest in the Green Zone?
This is easier said than done as we all as Advisors know.
Then what is the solution?
Solution is adopting Asset Allocation strategy in their portfolios for Equity Investments.
This can either happen by adopting some Algorithm (Calculator) like that of MisterBond which will guide the Advisors on re balancing between debt & equity at regular intervals like monthly or quarterly or invest in some re balancing schemes which re balance between debt & equity based on market fundamentals like PE, PB, Dividend Yield or a combination of any two or three of these parameters.
These will work around Investor Behavior & Irrational Investment patterns by BUYING LOW & SELLING HIGH with constant profit booking in built strategy.
This article will be followed up by another on importance of asset allocation strategy and MisterBond’s Algo to hemp Advisors follow this strategy