It’s famously said that
time in the market is better than timing the market.
While the statement is largely true, this assumes that
- you have picked the best stocks that can stand the test of time
- the macro and micro dynamics are going to stay pretty consistent across decades
The reality is that most of us aren’t good at predicting stocks that are worth holding for decades. The other reality is also that as a generation, we are also not looking to hold something for decades at length and we ideally like to consider 5 years as a long term investment v/s say our elders who probably thought 10 years was a long term investment period.
The market dynamics have changed and become much more volatile in the last decade be it due to globalization or technology-led disruption.
Volatile market cycles require better portfolio rebalancing for better risk-adjusted returns
While holding blue-chip stocks can be rewarding as a long term approach, the reality is that there are more risk-adjusted returns to be made by having the portfolio adjusted across debt and equity depending on market cycles.
But then, who knows how to time the market cycles and adjust the portfolio accordingly? If all of us did, we would be very close to retirement already.
Dynamic Asset Allocation Funds Are A Great Bet For Long Term Risk-Adjusted Returns
I have spoken at length about dynamic asset allocation funds which primarily switch portfolio allocation across debt and equity based on market cycles.
Debt and Equity markets are for the most part inversely correlated which means that a dynamic asset allocation fund can essentially balance the risk & reward based on market cycles.
As a long term investor looking for optimal risk-adjusted returns, imagine the two scenarios,
- You start with a 50:50 allocation to debt:equity
- March 2020 (Covid) hits and your equity portfolio declines by 50%
- You are technically now looking at 75% allocation to debt and 25% to equity (notional)
So, even if you wanted to continue taking a 50:50 approach, that no longer holds. More importantly, if you continue making your recurring investments on a 50:50 basis you are losing the opportunity to invest more in equity given the prices are dirt cheap.
In essence, not only is your ideal allocation not being met, it is also suboptimal. This is because over a long term horizon, you ideally would want the allocation to be made where the market cycles reward a particular asset class more than the other.
A dynamic asset allocation fund could actually do the trick wherein depending on market cycles, your portfolio gets rebalanced automatically. While there might be potentially lower returns at times due to investment in debt, there will be better risk-protection.
A Dynamic Asset Allocation Approach
For instance, looking at some nuances from a fund like Aditya Birla Sun Life Balanced Advantage Fund, we know why this approach, backed by their expertise, helps in managing long term investment portfolios.
- Their model moved to the equity overweight zone (75% – 80%) in April-May 2020 period which is the highest exposure band. Hence they had increased their net equity exposure to 75% – 80%. With a sharp rise in the market valuations, net equity exposure was subsequently trimmed.
- Imagine still trying to be 50:50 in debt:equity in April-May when the equity markets were witnessing some of the biggest corrections in a while. That was a great time to up the equity exposure, which is what the fund was able to do.
- It is just not about increasing exposure to equities, it also matters which stocks get picked.
- For instance, the fund picked up some names in Auto, Banking, NBFCs, Insurance, Metals, Cement, etc. given the larger delta between their valuations and price.
- Over the next few months, the portfolio got re-aligned again to trim some of these positions as market dynamics shifted to better alpha opportunities in healthcare, etc.
This expertise-led dynamic asset allocation approach that I have seen in Aditya Birla Sun Life Balanced Advantage Fund is what gives me the peace of mind to always know that irrespective of market cycles, a major part of my portfolio will auto-adjust to deliver good risk-adjusted returns and aid my wealth creation goals over a 5-year horizon. I can always diversify my portfolio with short-term (6 – 12 months) pure equity exposure, and have a sizable pure debt exposure for my emergency needs (3 – 6 months) but having a Dynamic Asset Allocation balanced fund gives me the cushion of not having to make a ton of effort & research to keep my long-term (5 – 7 years) investments poised for optimal growth.