Do you have the courage to buy an asset class when it is not doing well and sell when it is?!

Published: September 5, 2019 at 10:59 am

Happy Teachers Day! There is no greater teacher than life in general and El Mercado – the market – in particular. We often forget its most important lesson: buy an asset class (eg gold or stocks) when it is not doing well and sell when it is doing well. No, I am not suggesting that you buy gold and I am not referring to timing the market.

Even a simple annual rebalancing which is 101 portfolio management needs courage and conviction to sell performing assets and buy non-performing ones. Allow me to explain, but before that, if you are interested in some Teachers Day reading: Five life lessons from my teachers and if you are interesting in expressing yourself: Vlogging has incredible reach and opportunity for satisfaction and money!

Did you notice that the number of should you buy gold now? Should gold be part of your portfolio? kind of articles are seen frequently now? But why now? Why did no one talk about it last year, the year before that, the year before … If gold should be part of your portfolio, then surely you should have held some in the last few years is it not?

Now, have a look at the gold price chart over the past decade or so. First focus on the period marked by the arrow.

Gold Price chartAfter hitting an all-time high in mid-2012, gold went through a rough patch for more than six years. Ask yourself, (1) how many people talked about buying gold during this period, (2) if you are considering buying now, why did you not buy then when it significantly more attractive?

Now, look at the ovals. AMCs planted articles everywhere about the need to have gold ~ 2010-12 as they were busy launching gold ETFs and gold funds. Even they became silent during the arrowed zone. To give credit where it is due, the only AMC that has been consistently talking about “having some gold in the portfolio” is Quantum.

Now, when gold has started to move up, everyone is at it again. Now, please do not misunderstand: I am not asking you to buy gold. Not now, not ever. It is an unproductive asset class with a risk much higher than reward. A point established time and again here: Gold vs Equity (Sensex) 40-year return and risk comparison

Also, see:

The point I am trying to make here is different. If you wanted to buy an asset class, if you want it to be a part of your portfolio, then you have the courage the buy it when it is not performing. To be more precise, you should have the courage to sell an asset class that is performing well and buy the non-performing asset class. That is how a portfolio is steadied and risk reduced.

Let us take an example. Shown below is the normalized movement of Nifty (TRI) and Gold (INR/gram) from 11th Jan 2008. The log of the prize movement is shown. For God’s sake do not think, “if I had invested a lump sum in Gold on 11th Jan 20008, I would have got more returns than Nifty”. That is immature thinking and we will look at rolling returns below in response.

Gold vs Equity RebalancingFirst, let us focus on rebalancing. Assuming I had a portfolio of stocks and “some gold” from Jan 2008. For the sake of simplicity and for highlighting a point, let us leave out fixed income or treat it as “separate”. By 2012-2013 I would have seen gold exposure in my portfolio become higher than what I planned for. So I would sell gold (a performing asset class) and buy equity (a non-performing asset class).

Then by 2014, equity exposure would have increased, I should have then sold equity (a performing asset class) and purchased gold (a non-performer). Again should have done the same by end 2017 or even end 2018.

I am NOT referring to timing the market here. I could have rebalanced between equity and gold just by looking at my portfolio and having a target asset allocation in mind. Most of us lack this courage to sell a performing asset class and buy a non-performing asset class.

We always want to buy a performing asset class (eg gold now) and stop investing in a non-performing asset class (eg equity now). This is downright stupidity. The press and media sense this and feed in articles like, “should you stop your SIPs?”, “Should you buy gold now?” etc.

Gold vs Nifty Rolling Returns over 11 and 12 years

Over 11/12 year periods, sometimes Nifty has done better than Gold and sometimes not.

Gold vs Nifty Rolling Returns 11 yearsGold vs Nifty Rolling Returns 12 years

Now, do not look at this and say, “this means I should have gold in the portfolio, does it not?”.  Sure, go ahead. How much gold do you dare to have? How long will you wait for it to deliver (this applies to equity too) – would you have stayed put in gold between 2013-2018? Are you ready to pay tax when you sell gold?

Talk is cheap. Or is more expensive than gold? So, do you have the courage to buy an asset class when it is not doing well and sell when it is?!

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About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
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