There seems to be a common perception that those who invest via SIPs are expected to do nothing else but invest systematically. Thanks to certain “advisors” many investors believe that all one has to do to get “good returns” from equity is to continue a SIP through market ups and downs. Then it will all turn out okay in the end. This is an amusingly simplistic assumption.
Then are those who incorrectly believe that SIP is a method to minimize market risk, while all it does is buy at random market levels each month. The accumulated corpus via SIP is exposed to the entire ups and downs of the market.
It is a no-brainer that the risk associated with a volatile asset class has to be managed. There seems to be too much emphasis on when the next investment is to be made, while the real risk lies elsewhere – the corpus.
A mutual fund SIP is hope, not a strategy! One cannot assume that a dull and boring SIP is all that is required to achieve our long-term goals. Similarly, buying on dips alone does not reduce the risk associated with the corpus.
After a few years of investing, the next monthly installment would become a fraction of the corpus accumulated. Should I worry about when to invest that fraction or should I worry about de-risking the corpus?
I would rather keep investing systematically regardless of market levels and focus my attention on the amount accumulated in my equity portfolio.
In an earlier post, I had discussed some simple steps to de-risk our investment portfolio. Attention to asset allocation at all times is crucial.
Anytime there is a marked departure from my intended allocation in equity and fixed income, I rebalance the portfolio, again without regard to market levels or trend. This in my opinion, is a key risk reduction technique.
Some prefer to rebalance by following trends. That is, rebalance whenever index PE> 23 or something similar. Relatively speaking, this is much better than using PE only to time the next investment.
Then there are others who adopt tactical asset allocation based on trends. That is, they will not hesitate to move from a portfolio with 70% equity to one with 30% equity if the PE spikes.
These are all risk reduction approaches.To assume that it is common sense that risk reduction results in return enhancement is a misconception. Rigorous studies have shown that the correlation between the two is not strong enough: Is it possible to time the market?
I am a big fan of continuous risk reduction (not just “close to the goal” as some fairy tales suggest). If we know how to measure risk with personalized benchmarks, it can be managed systematically without stopping our dull and boring SIPs.