3 Apr 2020

How I blew an opportunity to buy equity funds for cheap

Equity investments are losing valuation due to the market crash. Depending on whom you ask, what to do in such a situation varies. The advice I took was to maintain asset allocation and rebalance when the allocation is off.

It’s not obvious how maintaining asset allocation can help during a market crash like this. But it’s not hard to understand if you think about it a little. Let’s say your desired asset allocation is 30% debt and 70% equity. When equity loses value and debt increases in value, your portfolio could get to something like 38% debt and 62% equity. The advice is to sell your (potentially overvalued) debt and buy undervalued equity at a cheaper price. As the equity market recovers, you would make some profit.

I did have a desired asset allocation before market rout, but due to some (self-induced) complexity, I had messed it up. I was over-invested in equity than I had thought. I discovered that mistake when I was taking a deeper look at my portfolio. I also found out that equity losing value had brought my portfolio down to the desired allocation. I don’t have to do anything for now; the market has rebalanced my assets. 🤦🏾‍♂️

But that also means that, because my asset allocation was off, I am not able to buy more equity at a cheaper price now. The equity I hold were bought at a higher price and I am holding onto the loss. It’s a lost opportunity.

While it’s true that nothing stops me from buying more equity now even if it means my asset allocation will be off for a while. I have decided to not do that because that’s essentially timing the market. There’s no guarantee that the market will recover after my equity purchase. Debt funds, at least in India, are not really going up in value either. Because many companies are at the risk of going bankrupt, investors are not keen to buy debt funds as well. Because demand is fairly flat, the value is also mostly flat. By selling my debt funds now, I may not be selling overvalued assets.

Moral of the story: asset allocation is actually important. Assets being off balance could lead to lost profits.

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