1) When we start with Asset Allocation, actually we are already underweight equities (less than 100%) based on the % of temporary falls we can tolerate.
2) This default underweight does not require identifying 'when' the market will crash. But should be based on expectation (derived from history) i.e 10-20% temporary decline almost every year and 50-60% temporary fall once every 7-10 years in equities.
3) If markets happen to crash suddenly, our default underweight position (called asset allocation) will reduce the impact and debt allocation can be used to buy at lower levels
4) Going underweight beyond this needs to be a rare thing - not trying to time every 10-20% fall. Here is a heuristic for going u/w below the original allocation - even at 20% lower prices will you still be negative on the markets - if yes, then this needs serious evaluation.
5) Look out for a combination of extremes in 1) Valuations (pe,pb,mcap to gdp, earnings yield vs bond yields), 2) Earnings cycle 3) Sentiments (fii, dii flows, ipo, past returns etc)
6) Remember markets can remain irrational for a long time - and you may miss out on significant upmoves - the last leg of bull markets is vociferous.

The best of investors and economists have got underweight calls wrong. We are no exception.
7) So build another layer of "room for error" via shifting to Dynamic Asset Allocation funds instead of debt when you want to go underweight. Trend following strategies may work well.

Don't take the all in or all out approach. Keep it limited to a certain % of equity.
8) If you find all this complicated. It is! Here is a simple solution - Time and Patience are superpowers. If you got this, ignore all the above and stick to a simple annual rebalancing plan. This will do wonders!

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More from @arun_kumar_r

29 Jan
Build a portfolio assuming we won't be able to predict and step out of future temporary declines.

1) Asset Allocation - Add Debt to reduce declines to a level that can be tolerated

2) Diversify via different investment styles (Quality, Value, Mid/Small, GARP, Global)
3) Rebalance Annually if equity exposure deviates +-5%

4) For large lumpsum inflows - Stagger via Time or Valuations

5) Automate monthly investments via SIP
6) Create a Bear Market plan to deploy money from debt to equity of market falls more than 20%

7) Bubble Zone Plan - To reduce equity exposure when valuations + earnings growth + sentiments indicate low future returns

Read 4 tweets
25 Oct 20
A superb recent performance may sometimes mask dangerous risk-taking. A dismal recent performance may sometimes mask a solid investment process and good long term track record. Differentiating both is unfortunately more art than science.

A thread on how to address this...
1) Consider full market cycle performance from peak to peak or bottom to bottom.

2) Check how did the performance occur - huge sector calls, concentration, mid & small cap exposure etc

3) Check downside capture ratio and declines vs benchmark in all major falls
4) Do you understand the process?

5) Do you have a rough quantitative/qualitative check for the process by looking at portfolios?

6) Will you be able to tell if the process is followed especially when a fund is underperforming?
Read 5 tweets
10 Sep 20
1) The real challenge in a bear market is that at some point, you will get fooled thinking, you should have seen the decline coming.

Then comes a stage when you think the markets will go down but don't act and it actually goes down.

This is where the mind games begin.
2) You predicted the market would fall. It fell exactly as you predicted!

If only you had listened. Regret takes over.

Looks like the market will fall again. History shows no one can predict. But f**k history. You predicted the fall.

You utter the most dangerous words...
3) "Let me exit equities and enter later"

It falls further proving you right. False Bear market rallies make you more confident on your prediction capabilities.

And finally the real rally starts amidst all the bad news. You think its yet another false rally.
Read 5 tweets
27 Jul 20
The policy response to the current crisis is unprecedented in its speed and magnitude. As a result, we have asset reflation in warp speed.

You can read the key takeaways from the recent Bridgewater note in the below thread..

1) What took three years and seven months in the Great Depression took one year and six months in 2008, and only one month in the current crisis!
2) In the Great Depression, it took 3 years 7 months from Black Thursday before President Roosevelt broke the peg to gold, allowing the Fed to print enough to stop the free fall in equities and the economy, and the reflation continued for 4 more years before the next downturn.
Read 10 tweets
23 Jul 20
Here is a thread on evaluating Gilt funds:

For a detailed version visit:

It all starts with the simple question:

Is this the time to buy Gilt Funds?

Let us find the answer using different vantage points from 6 eccentric folks..
Here is a thread on evaluating Gilt funds:

For a detailed version visit:

It all starts with the simple question:

Is this the time to buy Gilt Funds?

Let us find the answer using different vantage points from 6 eccentric folks..
QUICK GUN MURUGAN: Looks at problems using intuition, gut reaction, and emotion!

Reaction 1: Credit Risk Funds are going through several issues – defaults, downgrades, redemption pressure, illiquidity, concentration risk etc. Image
Read 25 tweets
18 Jul 20
Some learnings from past few months:

1) Handling bear markets finally boils down to psychology
2) Having a pre-defined what if things go wrong plan (when to invest + how much to invest + where to invest) creates the much needed 'feeling of control'
3) Having some debt allocation which can be moved to equities partially at lower levels - can help you change your frame of reference - you are suddenly waiting for the markets to fall to your pre determined levels
4) This is illogical as your remaining amount is down but works!
5) Inherent conviction on entrepreneurship (read as equities) to create long term wealth is a must
6) As things get bad and after each fall, the lure to predict exponentially increases - you utter the most dangerous words "the markets will fall further let me wait for clarity"
Read 8 tweets

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