Riding the Stocks Wave ?

Same is true for stock markets.

If stocks are rising, there is little benefit in complaining why there is no reason for the rally or that no-one knows anything or that this is all a house of cards and one day it will come tumbling down. It is pointless not because of whether it is right or wrong,  but because pretty much no one is listening.  Try walking into a pub at 2 am and tell people the benefits of sobriety – you get the picture!

It is pointless also because no one really knows how it is going to play out. Yes, there is data that shows stocks are overvalued compared to history, but there is also data that it is justified given low yields. Who to believe?

We have always said believe neither and we stick to that today as well. The problem with bull markets usually is not that the markets are rising – that’s the fun part. Great stories may start with lost fortunes but all the fun ones begin with the making of one. It is the false sense of complacency that most investors have that when the tide turns they will be able to get out before everyone else. This notion or belief,  which I hear from some of our investor base today, is also not new.

Edward Chancellor in his celebrated book “Devil take the hindmost – A history of financial speculation” reports a letter written to The Times.

There is not a single dabbler in scrip who does not steadfastly believe:

first, that a crash sooner or later, is inevitable; and,

secondly, that he himself will escape it.

When the luck turns, and the crack play is sauve qui peut, or devil take the hindmost, no one fancies that the last mail train from Panic station will leave him behind.

In this, as in other respects, ‘Men deem all men mortal but themselves.’

Stocks allocation in portfolios is rising. People are rebalancing from debt to stocks when your asset allocation would want you to do the opposite.  If your asset allocation was 60% equity and 40% debt and due to recent stupendous rally it has moved to 70% equity, the right rebalancing is to go back to 60% equity by selling some equity and buying more debt. Alas, we see signs of investors doubling up on stocks – either through equity mutual funds or direct equity investments.

The worst is investors moving to 100% stocks, especially the younger ones falsely believing that they have nothing to lose and a long time horizon to catch up if things go south. You do have the liberty of time and you should use it wisely. But do note most young investors who lost 25 – 30% in stocks in the 2008 downturn never came back to investing again. That is a lifetime of compounding lost for the greed of a few more percentages in returns.

Don’t be one of those investors.

Asset allocation is not just for bear markets, it is essential for bull markets too. As it goes, the higher a wave rises the harder it will eventually crash. By all means, ride the equity market wave, but keep the asset allocation in line.