Volatility is here to stay. Invest in an all-weather portfolio to beat it

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Both international and domestic equity markets are currently at new highs. Gold was the highest performing asset class in 2020. In debt, interest rates are some of the lowest ever seen. All major asset classes, as a result, seem unattractive.

There is greed, but there is also fear of an impending fall. How does one invest in this scenario?

First thing first. You must realise that it’s extremely difficult to escape market corrections and predict bull markets. Peter Lynch famously said: “Far more money has been lost by investors trying to anticipate corrections than in the corrections themselves.”

So if one cannot escape market corrections, how can one minimise the pain from them?

  • Invest in multiple asset classes

If one cannot predict which asset class will do well over the next 6-12 months, the best strategy would be to invest in all of them. A process where an investor can spread bets across different asset classes according to his/her risk profile. This is called asset allocation.

How does multiple asset classes help investors in richly valued markets? Let’s assume an investor invests in equity, debt, international equity and gold. These are the top four asset classes available to most investors today. Historically, all the four asset classes have shown very low correlations. What that means is that never have all four asset classes moved together. If equity falls tomorrow, then gold, debt and international equity will minimise short-term losses and vice versa for other asset classes.

Asset allocation can ensure that investors take the risk of investing in long-term equity without the risk of a short-term drawdown (if it happens).

So, what happens when one of the asset classes underperforms? One of the most prominent features of asset allocation is re-balancing. What happens if domestic equity or gold does badly? Is it right to sell them and re-invest in others? The answer is, do the opposite: sell the winners and invest in the losers. This has historically led to 2-3 per cent higher returns for investors, keeps the investors at the same risk profile and keeps him/her disciplined.

  • Invest in SIPs or staggered way

SIP is one of the simplest and strongest investing concepts out there. It avoids greed, since the investor is not committing large amounts, and avoids fear as the investor stays disciplined over long periods. An SIP can eradicate the risk of timing the market. Investors who start SIPs at the peak of market cycles end up making the same returns as investors who invest at the bottom. This could be an additional way of investing in a highly valued market.

Investors who are holding back in these times should not fear short-term loss, as it is likely to negatively affect their long-term gains. Instead, use a multi-asset approach to invest and stay clear of market volatility.

(Pratik Oswal, Head of Passive Fund Business at Motilal Oswal AMC. Views are his own)