An old Spanish novel, Don Quixote by Miguel de Cervantes, carries a pearl of wisdom: “It is the part of a wise man to keep himself today for tomorrow, and not to venture all his eggs in one basket”.
The hidden piece of advice in not putting all your eggs in one basket is averting the risk of losing everything by maintaining different baskets, i.e. by diversifying and following asset allocation.
Two premium realty stocks set for Bullish Reversal on the charts
Diversification and asset allocation are the foundation stones of investing. Harry Markowitz’s Modern Portfolio Theory (MPT) also propagates the idea of diversification. It needs to be done not just within a respective asset class, but across asset classes. This is where asset allocation comes in.
Often, investors, going by their favourable past experiences tend to skew the portfolio to one particular asset class. After the COVID-19 pandemic lows, a lot of investors — even those, in reality, having a moderate or low-risk appetite — started investing in equities in the endeavour to earn better returns, overlooking the reality that past performance may or may not sustain and is in no way indicative of the future returns.
While Indian equities have demonstrated strong performance since the pandemic lows, there have also been phases or periods when the markets have eroded investors’ wealth, such as the Harshad Mehta Scam of 1992, the dotcom bubble, the global financial crisis of 2008, and the initial period of the COVID-19 pandemic, among others.
The Indian equity market has once again hit turbulence, and volatility has intensified. This is because of a mix of domestic and global factors, viz. the tariff wars, weak Indian rupee against the greenback, rising bond yields, geopolitical tensions, potential geoeconomic fragmentation, supply chain disruptions, imported inflation, evident slowdown in consumption, corporate earnings having entered the slow lane of late, higher financing cost, climate risk events, and the potential impact of all these factors on economic growth.
It is also true that valuations in the Indian equity market are still lofty compared to global peers, which is why foreign investors are selling and looking for other markets to invest in. The trail Price-to-Equity (P/E) ratio of the MSCI Index is currently around 26x,
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