How to Benefit From the Bull Market While Protecting Your Wealth on the Downside

 

The markets are at 20,000 levels again – and the question on everybody’s mind is how do I still make money while not exposing my wealth to the volatility of 2008?

 

The answer is simple.

First, consider what you will use your wealth for. You must have certain things in mind for your money. If you look at yourself and your immediate family – there would be certain goals that would come to mind. These expenses (or goals) would be happening in the short term (less than 2-3 years away), the medium term (3 to 5 years away) or the long term (more than 5 years away).

 

Let us consider some short term goals.

For example – we are coming close to New Years, are you and your spouse planning a vacation soon? Do you have a home loan or any other liabilities for which you are making regular EMI payments? Other than regular household and annual expenses, is there anything else you will probably spend on in the next 3 years?

 

If you have answered yes to any of these questions – then the money that you need and intend to use, should not be anywhere near the equity markets. If it is, then now is a good time to book your profits or to redeem the relevant investment completely, and put it in a safe place – like a sweep in fixed deposit attached to your savings account. Sweep In accounts give you the benefit of the interest rate of a bank FD along with the liquidity of a savings account. By keeping the funds in a safe instrument, not exposed to market volatility, you are effectively de-risking the goal corpus.

 

Now consider some medium term goals.

For example – are you accumulating funds for any major purchase? Do you plan to put the down-payment (or purchase outright) on a house or another car? Will your child be going to college (graduation, post graduation) sometime in 3 to 5 years?

 

In this case, your portfolio should be skewed towards debt and fixed income products. Your exposure to gold and equity should be not more than 35% of your portfolio, and as the goal draws nearer, you should further reduce the exposure to equity (try an STP from your equity mutual funds into appropriate liquid funds). It is not possible to accurately predict what will happen to the markets as your goal is around the corner – so the safest thing to do is de-risk your goal corpus. Once the goal is around the corner – there should be absolutely zero equity exposure.

 

Now we come to the long term goals.

This is the component of your wealth that is currently invested in the equity markets. Ideally, you should not plan to remove this money for 5 years at least. Equity markets perform the best over the long term i.e. 5 years plus. If your current equity portfolio is that money that you don’t plan on using for another 5 years, then you need not keep checking the market levels daily. Just sit back and relax, and let your wealth grow over the long term. Your exposure to fixed income and gold will protect your wealth level in case of any downside in the equity markets (equity and gold typically move in negative correlation to each other – when equity falls, gold rises).

 

By taking exposure to different asset classes, with different characteristics – you will be balancing the risks of your portfolio with assets that move in different cycles to one another.

 

Also, as we know, when equity does well, gold and debt typically are not performing at their best. Similarly, when equity does poorly, gold tends to rise, and when interest rates are high (fixed income is doing well), equity tends to suffer.

 

Different asset classes lead the markets at different times. By giving yourself the right amount of exposure to each asset class, you will save yourself the trouble of guessing which asset class is going to be the leader this year.

 

Remember, to protect your wealth, benefit from a bull market, as well as protect on the downside – you must have the right exposure to the 3 asset classes – equity, debt and gold.

 

In other words, to grow and protect your wealth – you must have the right asset allocation.

 

To know what your asset allocation should be – use our Asset Allocator Tool!

 

To speak with an Investment Consultant who will help build a personalized Financial Plan for you to grow your wealth, simply write to us.

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