Markets at lifetime high: Is it an investment opportunity or a risk?
Published by Mint
Abhishek Kumar's role: Wrote this article
Abhishek Kumar wrote this column on the market-to-GDP ratio and its limits, arguing that long-term investors should rebalance according to their own risk appetite and asset allocation rather than a single indicator or rules of thumb.
What Abhishek Kumar said
What does the market-to-GDP ratio tell me, and where does it fall short?
The ratio compares a country's total stock-market value with the size of its economy, so when it sits well above its long-run average it hints that prices have run ahead of output. I treat it as one input, not a verdict. It ignores interest rates and inflation, both of which move valuations, and a market dominated by a few sectors may look nothing like the wider economy, so the ratio can mislead. I would never rebalance a long-term portfolio on this single number.
Should I act when markets hit a lifetime high?
Not automatically. The market will do what it does, and I do not think investors need to respond to every move. Before touching a long-term portfolio, I suggest asking two questions: what is my risk appetite today, and has my asset allocation drifted from where I decided it should be? If the answers say nothing has changed, a new high is simply a headline. If the equity share has grown past the range I am comfortable with, that is the reason to trim, not the level of the index.
Is '100 minus age' a sensible rule for how much equity to hold?
I find it too blunt. Personal finance is personal, and a rule built for an average demographic rarely fits an individual. A young investor who has been burnt once may be very risk-averse, treat a notional loss as a real one, and with a small corpus may be right to invest cautiously. A retiree with a large corpus that already covers their needs may reasonably hold more equity than the formula allows. I would set equity exposure from the person's own appetite and situation, not from their age alone.
When should I rebalance my long-term portfolio?
I suggest rebalancing when the allocation moves outside the range you can tolerate, for either of two reasons. Your own risk appetite may have shifted; it is a moving target that changes with life events and with experience of market cycles. Or, as happens in a strong rally, market returns alone may have pushed the equity share beyond your comfort level. Either way, the trigger is the gap between where you are and where you have decided to be, not the market's daily mood.
In our words, from what he said in the piece. General information, not personal advice.
More of Abhishek's views on money management
A Mint column on how to respond when markets reach record highs, prompted by the Sensex peak in January and a market-capitalisation-to-GDP ratio of about 120% against a 10-year average of around 87%. It discusses the limits of that ratio and the case for basing rebalancing on one's own risk appetite and asset allocation rather than rules of thumb. The column is written by Abhishek Kumar.
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Markets at lifetime high: Is it an investment opportunity or a risk?
