Stock Market Overheated? Worry About What is Invested and Not When to Invest!

Published: April 6, 2017 at 9:58 am

Concerned that the stock market is overheated? Then here is why it makes sense to focus on the risk associated with the money already invested and not worry about when to invest more. Suppose, I have a long-term goal and I can only spare Rs. 500 towards an equity SIP. I choose a nondescript mid-cap mutual fund and start a SIP for that amount in Aug 2009, switched to direct sometime in 2013 and kept SIPing. Today, the net annualised return (regular + direct)  would be about 23-24% and the fund will have a value of almost 1.1 Lakh.

The market is supposedly overheated, I don’t know or care, but suppose I take that sentiment seriously. Should I worry about the 1.1 Lakh already invested or about when to invest the next Rs? 500 after stopping my SIP?

What I am trying to drive at should be reasonably clear, but let me explain. If the market crashes tomorrow  ( a real crash, not AIFW*-style crash), I stand to lose say 40-60% of that 1 Lakh (accumulated over the last 6+ years) in the span of a few days. Is shifting that 1L to safer fixed income a greater concern or worrying when to invest the next month’s investible amount?

* AIFW –> Facebook Group Asan Ideas For Wealth, where I have been learning behavioural finance for the last 4+ years.

Btw, those numbers are real. That is the secret SIP I got going for my 9-year-old niece as their family is not well off.  When I started the SIP I wanted to give them one lakh when she graduated but with some luck, I may be able to give her more, if I can keep that SIP going (and manage risk).

Another example that is a bit more personal. My son is 7+ and I invest with an asset allocation of 60% equity and 40% fixed income (PPF) for his college education and hope to keep this ratio going for the next 5 years or so and the taper down the equity exposure.

The current asset allocation is ~ 67% equity and 33% PPF. So I decided to redeem 7% from equity and shift it to PPF in the next couple of days (it will be after 5th April – so what, who cares about such trivialities, I am a rich guy). This, of course, is an example of rebalancing. Or to be precise one-way rebalancing as I do not intend to redeem from PPF and invest in equity.

To be frank, I lack discipline when it comes to rebalancing. Sometimes I do it in December with my financial audit, sometimes in April or later without regard to market levels. Gotten away with it … so far.

The point I would like to convey with these two examples is this:

If (if) you are worried each time the market hits an all-time high or when there is a buzz about the PE or any other metric, focus on the asset allocation.  If the stock market is at an all-time high, then chances are that you have more equity allocation than intended. Redeem some amount and shift to fixed income – that is, rebalance your portfolio.  This would be an example of tactical rebalancing.

You could also check your allocation each March, and if it is higher than desired, you could shift some (up to 1.5L) into PPF, and/or a debt fund in April.

Managing the risk associated with the amount invested is more important than worrying about when to invest more. If not now, the amount invested would soon be much higher than the monthly investment (eg. 1 Lakh compared to Rs. 500 SIP)

Photo credit: redvers

Please keep in mind that rebalancing is a method to reduce risk/stress and not improve returns. Sometimes a higher return would be a pleasant side-effect, but I will not bet on it.

Also, the above arguments apply only if you are worried about stock market levels. If you are not, then you an consider rebalancing periodically y looking at the asset allocation alone.

If you are unfamiliar with rebalancing, you could give this a try: The What, Why, How and When of Portfolio Rebalancing With Calculators to Boot  

New Delhi DIY Investor Workshop April 23rd 2017

Register for the New Delhi DIY Investor Workshop April 23rd 2017

You Can Be Rich Too With Goal-Based Investing

is my book with PV Subramanyam. It is a jargon-free non-technical introduction to managing your money and comes with nine online calculators and detailed guides to choose equity and debt mutual funds.

A very concise and practical read. No nonsense advice to personal finance.

The best book ever on Financial Freedom Planning. Go get it now!

Your first investment should be buying this book

The (nine online) calculators are really awesome and will give you all possible insights

Thank you, readers, for your generous support and patronage.

Amazon Hardcover Rs. 317  21% OFF

Kindle at Amazon.in (Rs. 244.30)

Google Play Store (Rs. 244.30)

Infibeam Rs. 315 

If you use a mobikwik wallet, and purchase via infibeam, you can get up to 100% cashback!!

  • Ask the right questions about money
  • get simple solutions
  • Define your goals clearly with worksheets
  • Calculate the correct asset allocation for each goal.
  • Find out how much insurance cover you need, and how much you need to invest with nine online calculator modules
  • Learn to choose mutual funds qualitatively and quantitatively.

More information is available here: A Beginner’s Guide To Make Your Money Dreams Come True!

What Readers Say

Also Available At

Bookadda Rs. 371. Flipkart Rs. 359

Amazon.com ($ 3.70 or Rs. 267)

Google Play Store (Rs. 244.30)

Do share if you found this useful
Share your thoughts on this topic at the  Reddit freefincal_user_forum

Reach your financial goals like a pro! Join our 1600+ Facebook Group on Portfolio Management! You can now reduce fear, doubt and uncertainty while investing for your financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community. The 1st lecture is free!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!) or you buy the new Tactical Buy/Sell timing tool!
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
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any kind of paid articles, promotions or PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps