Seek Balance

If an asset class is hitting multi-year lows, then we tend to move away from it. On the contrary, when an asset class is nearing multi-year highs, we see the most clamour for it. Investor behaviour tends to shun risk exactly when valuations are very much in favour.

The current investment setting is seeing this happen across asset classes. Gold is near multi-year lows. Equity is near multi-year highs. Several metals and commodities are globally trading at multi-year lows. Yet, investor interest is mostly focused only on equity.

Why buy something when it is near peak valuations? Even if we choose to prefer equities, is it not possible to buy beaten-down parts of the market?

Investors must ponder over these questions carefully and work on improving asset allocation. Clearly, the pendulum has swung from one extreme to another. A decade ago, investors had owned too little equities and too much of other assets like gold and real estate. That balance has shifted significantly swinging predominantly towards equity. A more balanced approach is needed now.

Building portfolios which give due weight to different asset classes will work much better now rather than following an equity-heavy approach. Adjusting the weight is a smart way to adjust risk to more manageable levels.

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