What works in one year rarely works in the next. If an asset class performs well for two consecutive years, its capacity to perform well in the third is relatively limited. Only under conditions of euphoria do you see such performances happen.
Looking back at 2023, it belonged to small and mid-caps. Both returned close to 40% as a category during the calendar year. But how many of us remember that both of these categories returned negative returns in 2022? Most of us would not have recalled what happened last year.
Interestingly, gold has been a rock-solid performer in 2022 and 2023. It has performed better than debt and even the Nifty 50. When an asset class performs well, we tend to become overly biased in its favor, and when it does not perform well, we conclude that the asset class is not worth looking at. This closes our minds and stops us from objectively pursuing multi-asset investing. Most investors would have underallocated money into gold in the last year and overallocated it into small and midcaps. If you objectively pursue multi-asset investing, you will be able to participate in all asset classes in their performing phase and also move money from one asset class to another when the going starts looking too good to be true.
2023 will end on a high for small and mid-caps. It will also raise the question if we must be just as bullish in 2024 in these performing asset classes. The Nifty 50 benchmark has relatively not performed well in these 2 years, and it remains to be seen if this phase of underperformance will continue in 2024. The multi-asset approach will make us participate in an asset class during its phase of underperformance and reduce exposure during times of outperformance.
2024 will be a year where every investor will need to deal decisively with froth. There is no escaping that. The road to conservatism will always be filled with froth, and crossing the frothy road is the only way to safety.
