Equities At An All-time High – How Should You Play It?

Equity markets have shrugged off worries over COVID 19 and soared to stratospheric heights over the past year. Indeed, stock prices have defied common sense and valuation multiples and continued rising against the odds. Many small and mid-cap stocks have trebled since their abysmal March ’20 lows!

Counterintuitively, the current rally has led to heartache for a lot of retail investors. Many of them panicked and jumped ship when fears around COVID sank stock prices to rock bottom lows – only to fence sit on the side-lines as the unrelenting rally did not allow them an opportunity to jump back in.

The question that these investors are asking now is, what should they do?

Let’s start with what they should not do – they should not allow FOMO (Fear of Missing Out) to get the better of them and do the reverse of fence sitting; that is, get in hook, line and sinker.

Which begs the question – should they wait for a correction to plough their money into equities? The problem with doing that is the fact that in a market like this - which is awash with liquidity and brimming with buoyant sentiment, it is impossible to predict when a deep cut will come. In fact, whether it will come about at all.

Equity investors can take three sensible steps at such a time. 

First, they can opt for dynamic asset allocation funds over pure equity funds. These funds are uniquely positioned to capture a good portion of market upsides, without putting investors at risk of too much of a downside. 

Second, they can choose to stagger their way into equity funds via weekly STP’s (Systematic Transfer Plans) rather than investing lump sums. These STP’s can be fixed for a period of 12-18 months. This will ensure abundant rupee cost averaging during volatile market phases.

Third, investors can follow a disciplined asset allocation strategy within their portfolio. Instead of aiming for blockbuster returns at all points in time, investors should realize that some phases are “times for settling”. This is one such phase. Investors should aim to have no more than 40% to 60% of their portfolio into equities at these levels, with the rest flowing into lower risk assets such as fixed income funds, fixed deposits or gold funds. 

All in all, a balanced approach will be key. Do not try to time the market and wait for a deep correction to get in. At the same time, do not overexpose yourself to equities at current valuations. The next two years will see the disciplined investor emerge victorious. To borrow from cricketing parlance, this is the time to buckle down and be a Rahul Dravid; not a swashbuckling hero like Virender Sehwag.