Are you taking Equity Exposure just for the sake of it? It’s like eating food when you are not hungry. It will be right to say eating stale food (Bear Phase) instead of healthy food (Bull Phase). You may find expert suggestions to exit other asset classes but will never find a call to reduce Equity Exposure to NIL. As a retail investor, i took a call to quit Equity Investments. The key reason is that even if all the investors EXIT Gold, the gold prices will not be impacted much or collapse below the floor price. According to experts, the gold prices will not fall below the cost of production i.e. $950 per ounce. The reason being, the miners will stop production below the cost of mining. Similarly, if all investors stop buying the property, prices will not go below certain level i.e. cost. The builders will not sell below the cost and stop new supply as it is happening right now. It will help to maintain price near the cost. In short, it is possible to control the supply in case of property and gold to maintain floor price or cost price. Let’s check how it works in equity.
For a stock, the floor price or a cost price of the stock can be as low as a penny or virtual Zero. As i mentioned in my post, Stock Investment – When to Enter and Exit the Market that Book Value is actual/real value of the stock. In short, Book Value is like cost price of the stock. Now the big question is can the company control the supply of the stock if it falls below Book Value. For example, current Price to Book Value of Vedanta is 0.40. Therefore, the floor price for a stock can technically be ZERO. In short, the downside is unlimited. The reason being, supply cannot be controlled. Because of this reason, analysts always suggest you stay invested. It will not decrease the supply beyond a point else it may result in panic selling. Sometimes, i find very weird and illogical reasons given by analysts to retail investors. It increases my blood pressure. As investors, you should be beware of illogical reasons to increase/retain equity exposure.
Equity Exposure – Beware of 5 illogical Reasons to Invest
1. De-Sell other Asset Class: I find it quite appalling that reason given by one of the reputed analysts in favor of equity exposure is non-performance of other asset classes like gold, real estate etc. My dear friend forgot that equity has also delivered double-digit negative returns in last one year. The 3-year return is shockingly low at around 5%. Secondly, i should not increase equity exposure just because equity is better than worse. As i shared in my previous posts that NO Position is also a position in terms of equity exposure. You should not bid a permanent farewell to equity. Always wait for right time to enter and then exit at the right time.
2. Ideal Equity Allocation: There is nothing called ideal Asset Allocation. Ideal Asset allocation is only under ideal operating conditions. I would like to ask you whether our stock market operates under an ideal condition? The answer is big NO. Normally experts suggest that ideal equity allocation should be 100 minus your age. For example, if my age is 40 then my equity exposure should be 60%. I agree but it is not true always and most of the times. The equity exposure is dynamic in nature. In my opinion, the equity exposure under ideal asset allocation should be taken as a max limit. Therefore, if my age is 40 years then i will keep my equity exposure varying between 0% to 60%.
3. The downside is Limited: Another illogical reason for equity exposure. I am hearing this phrase right from 8500 till 7300. As i mentioned in my previous posts also that no one knows the bottom of the market. If you are going to invest by believing that downside is limited then it is the biggest mistake. You should overcome the fear of being left out. Wait for +ve triggers to kick in before you start investing.
I shared in a post on my biggest mistakes as an equity investor that you should not be swayed in the market. Till the macroeconomic indicators are favorable and FII’s pump money, you cannot say that market has found the bottom.
4. DII’s/Retail Investors are Buying: Every alternate day, the newspaper in morning greet me with a headline that DII’s or Retail Investors are buying. Trust me it is not a sentimental positive for the market. This point is totally illogical and irrelevant. My simple question is can DII’s/Retail Investors support the market and take it to next level. These set of investors are buying consistently from Mar’15 but the market is sliding continuously. Let’s be realistic about the fact that FII’s drive the market. If you are investing based on these news report then it is a most illogical decision to take an equity exposure.
5. Long term goals like retirement planning cannot be accomplished without equity exposure: Another plain lie. The long-term returns of the stock market are a hardly double digit. You can generate double-digit returns even from safe and secure debt investments. You may lose max a percent or two. The peace of mind is more important than going through roller coaster ride of the stock market. I am not against equity exposure but in my personal opinion, the risk element for long term goals should be minimum. The reason being, returns from the stock market are not that extraordinary as projected.
Another concern of analysts is that returns should beat the inflation. This topic was a hot favorite when the inflation was HIGH to pitch equity exposure. Now, no one discusses the same even once in three months. Let me ask, whether current investment in stock market is beating inflation or not? The answer is NO. In fact, currently the small savings schemes like PPF, Sukanya Samriddhi Account etc are beating inflation handsomely. As an investor please understand that inflation is cyclic phenomena. You will get two different phases. As an investor, if the average inflation for the 10-year cycle is 6% and i can generate returns of 9% from debt instruments then i am beating the inflation. In this case, i will be more than happy. The reason being, returns are risk-free.
Words of Wisdom: There is no thumb rule to maintain 24/7 and 365 days equity exposure. Your asset allocation should be dynamic depending on current scenarios that drive the stock market. You should enter when the conditions are favorable and exit before the bear wakes up. By following this simple mantra, a retail investor can make money in stock market. These periodic returns from stock market i.e. riding the bull wave will push your returns to double-digit. If the luck favors then this approach can help you beat the index returns handsomely in the long run.
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