Investing and a Road Trip

Lets assume that you are on a trip to reach a place which is 100 kms away. Now, lets assume that you need to make to that place in 10 hours. Would you ride 100 kms per hour regardless of road conditions or would you slow down on bad roads and make up the time by speeding on good roads (lets assume a 50:50 split between them).

Distributors of Mutual Funds want you to keep investing in good times and bad the same amount of money regardless of where the markets are (in terms of how expensive or cheap they are), they are suggesting that you ride along the road even though common sense will indicate that it makes a lot of sense to slow down on bad roads (to make the journey a better one) while making it up in good roads (when markets are cheap).

A 5 year return (End 2010 to End 2015) is bound to be disappointing since you entered the markets why they were pretty expensive. But stretch this to 7 years (another 2 years back) and it becomes one hell of a investment even if you did not do anything but sit as markets cratered 30% from its peak in 2011.

But what if you actually reduced your allocation on way up and added the same on way back down? The results thence is even more phenomenal. And before you think about whether I am just using hindsight bias to justify my view, I actually have build a model which reduced exposure as markets went up and added on the way down. And the returns were achieve without having caught either the high or the low.

In my opinion, regardless of what time frame you measure your returns, the overall returns should be not too jerky for even the best of minds can go crazy once we see our lifelong savings evaporating just because something bad happened in a country that one did not know existed before.

If you know your Risk Tolerance, do check out this sheet ย (Asset Allocation ) which provides the output from my model. Due to the fact that changes can be frequent (once or twice a year at max), I like to use Nifty Bees and Liquid Bees as the instruments of choice.

5 Responses

  1. bladenomics says:

    Didn’t get this – “what if you actually reduced your allocation on way up and added the same on way back down? “

    • Prashanth_admin says:

      Just as an example, lets take the last 1 month movement in market. Assume you have a SIP on market on a daily basis.

      In a simple SIP, you buy as the markets went up from 7550 to 8000. At 8000, you would have felt happy since average would be somewhere in middle. But then market starts tanking and you continue to buy. Now what we are back to 7550, where would your break even be?

      What if instead, you reduced weight to Nifty as markets went higher (Selling 20% of for example every 200 point rise). Assuming a entry at 7550, your first exit would be at 7850 and next at 8050, but 8050 did not come and hence you only unloaded 20%. Now, when its back to 7550, you buy back that 20% to get back to your Original Allocation).

      While in SIP, your breakeven would have been higher than 7550, here it would be lower. Of course, if only life was as simple as that, but I hope I have explained the broad thesis behind the Idea ๐Ÿ™‚

  2. shankar says:

    This is what many asset allocation oriented hybrid funds aim to do, like FT PE Ratio, PRincipal Smart Equity & even ICICI Dynamic to an extent. Have you checked their performance vs your model? As in your case expense would be much lower as it is index. Though a fan of simple SIP as VAP being a bit erratic to implement ( as we dont know the actual money that may be required to deploy MoM ) simple AA oriented funds do score too, See In VRO that the 5 year returns of Index funds is around 5% and these AA plans 9-10%, with lesser volatility.

    • Prashanth_admin says:

      VAP issue is what you underlined which is why while the idea is great, it can be applied only if you have say retired and want to allocate only X amount which won’t change.

      Regarding comparison vs Model, have worked on a bit. Maybe shall outline in a new post some day in future.

      5 Years at current stage has issue since we started off at higher base. Literally everything beats the plain Index returns ๐Ÿ™‚

  3. vivdev says:

    >>But what if you actually reduced your allocation on way up and added the same on way back down? The results thence is even more phenomenal.

    Didn’t see data on results in the post

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