Several readers have asked us how to invest as the market reacts to the US tariffs. Regular readers would know what our stance is. The following is for those new here.
The short answer is that your investment strategy should be independent of “current market conditions” or events. If it is dependent, you need to act now, or the fate of your hard-earned money rests on luck. Surely you respect your money better than that!
Every time an equity investor (MF or direct equity investor) wants to (publically) pull out of the market, there is a chorus that goes “stay invested” and other confounding blah blah.
However, the problem is that most investors have no concept of when not to use equity and even lesser knowledge about asset allocation. For example, I have seen several investors expect huge returns from the marker in the next 2-3Y, and they have not invested elsewhere (100% equity). The regular “stay invested” chants will not apply to them.
If you want money in the next 1- 3 years, you have two choices (IMO):
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- Assign your equity investments to long-term goals and invest as much as possible in safe fixed income you understand (bank RDs and FDs are more than fine). Postpone your needs if possible.
- If you cannot postpone your needs and if you cannot find enough money to fund the goal via simple fixed income products, redeem equity and shift to fixed income. Please note: No one knows what the market will do tomorrow, over the next six months or next year. What I have suggested is for you to sleep better. If you value FOMO more than your sleep, that I cannot help.
If you want money in the next 5- 10 years:
- Limit future equity investments such that your equity asset allocation is no more than 20% to 40% (the sooner you need money, the lower the allocation)
- Every few years, reduce the equity allocation and shift existing investments and future investments to fixed income. Plan for reduction today so that you can invest enough.
- If you can do this, then you don’t have to worry about tariff wars or other events.
- Note: This is not a guarantee of success. It is only a plan to take you as close as possible to your target corpus -with some luck you may end up with more. Again this is only for those value their sleep.
If you want money after 10 years (preferably longer):
- Limit your equity allocation to 50-60%.
- Have a plan to reduce equity allocation in a step-wise manner, starting several years before the goal deadline. Our robo-advisor tool automates this risk-reduction asset allocation scheme while planning for goals of any duration. Our research suggests that such an asset allocation scheme can work well regardless of market conditions.
It is not worth your time and energy to start worrying about your “investment strategy” whenever something spooks the market. We must recognise that something will always move the market up or down and develop a goal-based risk reduction strategy.