Trust the market to make your millions - Hindustan Times

Trust the market to make your millions

ByMonika Halan
Jan 04, 2024 10:11 PM IST

The year promises to be volatile in events and for markets. A practical strategy-based approach to your money can give you stability along with good returns

The year 2024 is likely to see a continuation of the trend of volatility, uncertainty, confusion and ambiguity — the VUCA world seems to be here to stay. General elections in two of the world’s largest democracies, India and the United States (US), two ongoing wars, a global financial sector that some say is teetering on the edge of another giant meltdown, and recession in many parts of the developed world are the opening cards that 2024 begins with. To navigate this extreme uncertainty ahead, you need the safety belt of some basic money rules.

The stock market index on a display screen at the Bombay Stock Exchange (BSE) building in Mumbai.(PTI)
The stock market index on a display screen at the Bombay Stock Exchange (BSE) building in Mumbai.(PTI)

Rule One: Make an asset allocation. No matter what happens in the world, there is a way to navigate the ups and the downs. A starting point is making an asset allocation between equity and debt. Equity is stocks through a mutual fund and debt products are fixed deposits, provident funds, bonds and debt mutual funds. Your equity allocation is the money you can commit long-term where the loss of value by even 20% to 30% will not cause you too much worry. The debt part of your portfolio is the safe part that is meant to give stability. It is the part you dip into if you need money short term. A good equity allocation is usually 100 minus your age. At age 30, you need to be 70% in equity. This formula works if you have six months of emergency money in a fixed deposit (FD) or a money market debt fund, and a good pure term life and a medical insurance policy. Remember that you can take the risk of equity only if you have the seat belt of emergency funds and insurance clipped on, but take the risk you must, as the next rule indicates.

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Rule Two: Don’t ignore equity. Why take the risk of equity at all if there is such extreme uncertainty ahead? Simply because equity long-term builds wealth. Let’s assume there is an unlucky Indian investor. She invests 1 lakh in the Sensex (the 30-stock index on the Bombay Stock Exchange) each year when it is at its highest point. She does this year after year for 30 years. She buys the index and the market falls. Her unluckiest 30 lakh, over this 30-year period, would have grown to 2.4 crore or a 12% average annual return. Equity is one asset class that has the potential to build long-term inflation and tax-plus growth.

Equity can go through a long period of flat or negative returns, but once the economy looks better, it goes on a growth spurt. During Covid, markets fell by a gut-wrenching 30% in just a few months. This was 2020. Today, despite the big crash, three years later, the stock market has given an average annual return of 15% over five years. I know of people who hold on for a long time and then capitulate into selling saying that FD or gold returns are better. Yes, they may be over a five-year period, but in a growing economy, the market catches up in a giant growth leap. You have to be patient.

Rule Three: Be boring. Leave the stories of multi-bagger stock wins at parties to people who know no better. Investing should be boring. Onboard a low-cost index fund on the Nifty 50 or Sensex.

Look for low costs and low tracking errors (the difference between the fund return and the index) in your index fund. Choose a mutual fund instead of an exchange-traded fund for liquidity reasons — ETFs need a buyer on the other side of your sale, mutual funds are mandated to buy whatever you bring to the market to sell. Once you have understood how to choose active mutual funds, build a basic portfolio of 50% in an index fund and 25% each in a mid- and small-cap active fund. Spend a lot of time choosing funds – these are forever funds. You never get out fully, but just harvest the fruit and allow the tree to keep growing.

Rule Four: Have a portfolio approach. Never get trapped in the question — is this a good time to buy gold or bonds or stocks? It is never a good time to be fully in any one product or asset class. You need a thali approach to your portfolio. Portions of different asset classes in the proportion that serves your age, goals and risk appetite. Nobody would feed sugar to a diabetic, right? And there is no need to have unregulated products like crypto in your portfolio that have the potential to destroy your financial health.

Rule Five: Rebalance. Again, never look towards the markets to seek an answer to the question: Is it a good time to sell? If you have spent time on Rule 1 and got your asset allocation right, then your cue to buy or sell comes from this ratio. If you were at 50% each in equity and debt and a runaway market takes your equity allocation to 70%, you need to sell equity and buy debt products so that you are back at 50:50. It is emotionally difficult to sell a winning asset class or buy when the markets are bleeding. But if the cue comes from your asset allocation, you can detach emotions from your buy and sell actions.

We don’t know how 2024 will play out and whether or not we are entering another giant crisis. But whatever the crisis, if the world does not end, then it does recover. You need to have the staying power to ride out the bad times. And if it does really end — it doesn’t matter, right?

Monika Halan is the author of the best-selling book Let’s Talk Money. The views expressed are personal

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