This is the most common question from our subscribers and prospects. This question is also a waste of time unless you are a swing trader who can go from full allocation to cash at a moment’s notice
The correct question is – Is my asset allocation, right ?
If you ask this question, the answer is nuanced and personal. Let’s take an example to explore it
Let’s say you are a professional who has a steady income and manages to save each month. If you budget your finances, you can estimate the level of cash you will save by the end of the year. If you are conservative and comfortable with 50% allocation to equity, then add equities if you think the market is cheap or find stocks within the buy range (subject to size limits)
Invariably your equity allocation will reduce when the market drops and you will buy cheap as you rebalance. Conversely as the market rises, the allocation will cross the 50% threshold and you can sell, aka rebalance to get back to the 50% allocation. In other words, you buying low and selling high automatically
You don’t get bragging rights, but will end up doing well over the long run
Your goal should be to figure out your equity allocation instead of worrying about market levels
A process and not an event
A good time to buy assumes that there is some special day when the stars will align and you can deploy all the cash. A lot of investors kept asking this question for the last few months, waiting for the perfect time and have missed a 25% rally from the bottom
We don’t subscribe to this approach
Our model portfolio is conservative by nature and we allocated more to equity as the market offered good opportunity even though we maintained a higher cash level.
The managed accounts are more aggressive and have a lower cash level. The downside is that managed accounts are more volatile, but also benefit more from an uptrend
Our entries and exits are graded and slow, with a certain allocation to cash to manage the volatility and risk at the portfolio level. The same concept can be used to define your asset allocation. Revisit this allocation every few years to adjust it based on your life circumstances. Once that is done, it’s a matter of rebalancing your portfolio from time to time
