InvestorQ : The index is falling (both the Nifty and the Sensex). How should I really restructure my portfolio of investments to make the best of this situation?
Katherine Gonsalves made post

The index is falling (both the Nifty and the Sensex). How should I really restructure my portfolio of investments to make the best of this situation?

Rutuja Nigam answered.
3 years ago

Here are some basic rules to apply in such cases when the markets are down. Here is how you can restructure your portfolio.

Falling index is the time to shift to quality

There are some stocks in the market that have shown consistent growth over the years due to a very stable and robust business model. If you consider the last 20 years, then stocks like HDFC Bank, Hero Moto, Reliance Industries, Eicher Motors are all classic examples. These stocks have managed to grow at a consistent pace through good and not-so-good times. However, what sets these companies apart is their focus on the top-line and the bottom-line as well as the quality of their business. These are the normally stocks that are the more preferred when the market starts falling. To be fair, these stocks will also correct in sympathy with the market but then there are 2 advantages. Firstly, these stocks will fall less as their business models are less vulnerable. Secondly, the stock prices will recover faster than other stocks. You must use the opportunity of a falling index to move your portfolio towards quality.

Focus more on defensives than on former starts and market heroes

What we can learn is that when the markets are correcting, never chase the stars that set off the bull-run in the first place. Take the case of 2000. The technology stocks that drove the rally were the worst hit. In fact stocks like HCL Tech are still below the dizzy heights touched in 1999, as is Wipro. Buying real estate stocks or infrastructure stocks when the market is correcting in 2008 would have been a similar exercise. Can you imagine what would have happened if you had added pharmaceutical stocks at each dip in 2016. You will be sitting on a huge loss and will perhaps sit on a huge loss for many years to come. That is because in all the 3 cases, the froth was coming off and the dips were hardly a buying opportunity. This is the time to focus on stocks like FMCG and private banks that can hold values much better. In fact, defensive stocks tend to vastly outperform when the index is falling.

Keep liquidity ready and your shopping baskets open

An interesting question is whether one must remain in equities or shift to debt altogether. Then you can use the liquidity of debt to buy stocks at lower levels. That is an extreme asset allocation approach and is neither recommended nor feasible. What one should do is to increase the allocation to debt and reduce the allocation to equity. The reason most investors lost out on buying stocks at attractive prices is because they do not have the requisite liquidity when stock prices are down. A greater allocation to debt will ensure that you have the required liquidity to enter stocks at lower levels.

Traditional asset allocation can work best in such cases

An important rider here is that you must adopt a rule-based approach to asset allocation. After all, asset allocation is about discipline and the advantage of this discipline is that your allocation automatically moves contrary to the market valuations. For example, if the stocks move up and the equity allocation goes up beyond the limit then you are automatically pushed towards debt. Similarly, if the debt portfolio has appreciated due to a sharp fall in interest rates, then automatically more money gets allocated to equities at lower levels. The good old asset allocation model may look quite mundane but it is your best bet of beating the odds in the market, especially when the markets are falling.

There is a positive side to every negative event and market falls are among them. Falling markets have two dimensions to it. Some of the finest investors make more money by being greedy when others are fearful and buying at lower levels. But for that your asset allocation has to be tweaked smartly and your liquidity management should be much better. The rest will follow!