How to create a market-independent investment strategy

Published on / By M. Pattabiraman Twitter: @pattufreefincal

Published: November 28, 2021 at 7:00 am

Last Updated on February 12, 2022

On Friday (Nov 26th 2021), the Sensex fell by 2.87%. One can easily speculate reasons for the fall and start wondering if we should stop investments or pull out money (we have started receiving such emails!). However, it would be far more productive to develop a simple market-independent strategy. Here is how one can do this.

The benefits of doing this are obvious. We invest systematically and manage risk in the portfolio systematically no matter what the market condition. There is no need to follow market news or market valuations. No need to take media “experts” seriously and worry about what to do. Once set up, the systematic management can be run on auto-pilot with no more than 30 minutes of portfolio review once a year!

How to create a market-independent investment strategy

The steps to do this are listed below.

  1. Be clear about when you need the money. This may seem trivial but is the most crucial step in the investment process. It decides how much risk we can take and therefore the asset allocation.
  2. Have reasonable return expectations. For example for long term goals, one should not expect more than 9-10% from equity after tax. Even today getting 7% after-tax from fixed income instruments is difficult. So after several years, this will be no more than 5-6%.
  3. Decide the initial asset allocation. For a goal more than 10 years away, 50% of equity and 50% of fixed income is just about perfect. See: Will Benjamin Graham’s 50% Stocks 50% Bonds strategy work for India? At best you can increase equity to 60%. Any higher than that the risk will be too high. See the asset allocation risk matrix here: I have just started investing in MFs how much loss should I be prepared to face?
  4. At this stage one usually starts the systematic investing. However, there is a catch – the key step is missing. Market returns are unknown and uncertain. To ensure we achieve our target corpus no matter how equity markets behave, we need a variable asset allocation plan. That is, how are we going to reduce the equity exposure so that the actual corpus does not deviate too much from the target corpus. The target corpus and the amount to be invested must be calculated by using this asset allocation plan. This is automatically accomplished with our robo advisory tool.
  5. Now the systematic investing can start. The other side of the coin – systematic risk management is already planned out in the above step. We only need to review the portfolio once a year; check our actual asset allocation and rebalance it if necessary to bring it in line with the expected values as per the variable asset allocation plan. The use of simple products like index funds will make the portfolio review even simpler.

That is it! This simple strategy will help you achieve your financial goals independent of market conditions. We have extensively backtested different variable asset allocation strategies and the results are available in our goal-based portfolio management course.

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      About The Author

      Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
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      Most investor problems can be traced to a lack of informed decision-making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
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