How to invest in sluggish markets

In range-bound or bearish stock markets, investors need to adopt a cautious approach to portfolios. Trading in stocks for the thrill, following the crowd, or trying to pick tops and bottoms can be equally damaging . Here are five ideas to make sure your portfolio weathers sluggish markets well.

Structured diversification

Portfolio diversification consists of distributing wealth across different asset classes like cash, debt, equity, real estate, gold and so on.

These asset classes have a certain return expectation and risk attached to them. In the current environment when both stocks and bonds are not able to perform, investors should not look only into Indian equity market, but also at offshore markets and other asset classes. These may becommodities, currencies, offshore funds - anything with low correlation to stocks.

Tactical asset allocation

Tactical asset allocation refers to the process of shifting between asset classes based on relative attractiveness. An investor would be overweight on equity when he believes stocks are trading cheap and overweight on bonds otherwise. An investor will engage in tactical asset allocation within the broad framework of strategic asset allocation.

Suppose an investor decides to have a 60-40 equity-bond allocation with a tactical range of 10 per cent for his retirement portfolio. The investor then has a leeway to carry equity exposure between 50 and 70 per cent.

Gold investment

Possessing gold has been a mark of prestige, but it has gradually turned into an important asset for investors looking to diversify their portfolio. How much gold should be in portfolio? Ideally it should be 5-10 per cent of your portfolio, but can be increased in inflationary times to even 10 per cent.

Gold also acts as emergency money. Imagine if you were out of yourjob and were looking at a 3-6 month period before you got another. How would you meet EMI and other expenses? The markets are down; to sell stocks now would be to book huge losses. If you have gold in your portfolio, you can quickly liquidate gold or borrow against it, to raise cash which you can use to tide over such emergencies.

Don't let emotions take over

Sometimes emotions induce you to act illogically and prevent you from thinking clearly about how an action (buy or sell) affects your financial standing. Use a professional advisor to stop you from irrational decisions. Always make a plan that focuses on your objectives. If your goals are long term, don't sell, stay with your positions.

Choosing an advisor

A good wealth manager should have a strong understanding of a client's risk profile, attitude towards risk and investment objectives and can thus recommend the right product. Also understand that an individual often represents the organisation's philosophy and thought process. You must make an effort to understand the philosophy and processes and choose an institution where the stated objectives are actually followed.

A simple litmus test is to check if the institution lays particular emphasis on risk profiling and financial planning; has a transparent advisory and product recommendation process, has a pre-mandated portfolio review frequency and has a client-centric approach.

(The author is Head, Wealth Management & Sales, Fullerton Securities)

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