A Tool to become Better Than Average Investor (Premium)

Any reasonable person would accept that you cannot perfectly time entry or exits in markets all the time.

If you believe you can, then you don’t need to read any further.

As many of you know, Stable Investor will soon be launching Stable Asset Allocator service, which will provide suitable asset allocation advice (i.e. how much in equity and how much in debt) once every quarter for your long term goals.

Now that brings forth the question – what exactly is a suitable asset allocation?

A perfect market timer will either be 100% in equity or 0% in equity. Because he knows the future and can time his moves perfectly. But there is no such thing as a perfect timer.

So in real life, we need a strategy that is repeatable, can be implemented for long enough and which offers a reasonably good chance at achieving better than average returns from the market for long term goals.

The Stable Asset Allocator isn’t a prediction service. But rather, it’s an asset allocation guidance mechanism that analyzes the present (which also includes a view on the future) and calculates reasonable probabilities from the past to arrive at a suitable allocation at a given point in time.

How is this achieved in practice?

The tool caters to 3 types of investors – i) Conservative, ii) Balanced and iii) Aggressive. And since these investor types are very different, the allocation advice will also be different for all three types.

Now comes the important part.

It is my view that an optimal portfolio is predominantly strategic in nature. But it does have a tactical component as well to make it more market-aware and nimble enough to position it dynamically for different market conditions.

To give an example:

A constant 50:50 Equity:Debt allocation strategy will maintain this allocation across all market types, i.e. in rising, falling or not-doing-anything markets. In such a constant asset allocation model, the mix of portfolio assets remains fixed unless the investor’s profile changes.

But the main disadvantage of such a constant allocation model is that it often ends up ignoring other factors like market conditions, availability of other opportunities, etc. among other things.

This is where the dynamic tactical part of the model comes into the picture.

So the earlier 50:50 constant model is changed. With the tactical overlay, it will try to have a lower equity allocation before the market falls (or when things look dangerous). Something like 30:70 Equity:Debt. This will help reduce the impact of fall due to lower equity. On the other hand, it will try to have a higher equity component (like 70:30) when market conditions are suitable for better-than-average returns.

Stable Asset Allocator also runs on a strategic + tactical framework.

It’s a more active way of running an asset allocation strategy. There are multiple factors in the model. But even if we talk about just one, i.e. market valuations (and here’s the proof why it works beautifully), then different valuation levels ideally require different asset allocation. And this is handled by a tactical strategy. There are several other factors which are used as inputs in finalizing the tactics in the model too.

But to summarize, Stable Asset Allocator offers a Strategic + Tactical asset allocation guidance, which provides a situation-aware allocation framework that dynamically adjusts portfolio to favourable and unfavourable conditions appropriately.

And that has a solid potential to generate better than average return in the long run.

I know what you are thinking.

Isn’t this what timing the markets is?

In a way, the answer is Yes it is.

But I would rather call it as a return optimization technique. Perfect market timing is about return maximization. But here, we are trying to tilt our portfolios occasionally to be better positioned for markets conditions.

Sadly most investors do not proactively manage their asset allocation. It just goes on unmanaged in the long run. As time passes, the allocation gets distorted due to various factors. If an asset performs well, people get attracted and invest more in it (greed). If it doesn’t, they move out at precisely the wrong times (fear). And fresh money generally gets pumped into random schemes and products, often ill-advised by commission-oriented agents.

Remember, equity doesn’t move in straight lines.

So even though it has a good long term potential, you can further improve your chances by being a little more tactical about your asset allocation.

Why? Because there are times to be bold and there are times not to be bold. So there are times to be heavy in equity and there are times when equity is not the best place to be.

And Stable Asset Allocator help you in all those decision makings

It has a core strategic allocation in place. But given the situational awareness and factor-driven tactical tilting, it sends out regular updates which are based on constant evaluation of market and economic variables. And this helps align the portfolio to a suitable allocation.

So it’s a weighted combination of Strategic Asset Allocation and Tactical Asset Allocation.

I have been investing most of my own money for years on the basis of this framework too.

Not only that, the backtests prove that when it comes to investing for the long term, a combination of running a strategic + tactical framework, if done correctly, can really get most of the job done.

It is also a way to diversify across time and different market environments as opposed to the common view on diversification that tries to diversify only across asset classes.

In my view (and I constantly highlight this to my existing clients) that as an investment advisor, the most important duty for me is to constantly assess, define and maintain the most appropriate asset allocation. At all times.

The Stable Asset Allocator is based on clear asset allocation rules that help reduce big mistakes and more importantly, give you a really good shot at being a better-than-average investor.

The general perception is that if you keep pumping money in equity, things will work out in the long run. But I feel that we can do better than that.

Nothing earth-shattering to say but I think it is essential to allocate your portfolio assets in a deliberate, calculated and a situation-aware manner rather than blindly doing what everyone else does.

As of the best investors of his generation, Howard Marks said ‘It’s essential for investment success that we recognize the condition of the market and decide on our actions accordingly.’

And what if you don’t manage your allocation smartly?

It will lead to an incorrect allocation of assets. As a result, your portfolio will either assume more-than-necessary risk or on the other hand, may not assume enough risk, thereby reducing future return potential.

Correct and proper allocation can only be achieved if you constantly monitor and rebalance your portfolio in a tactical manner.

Sadly, most people are only interested in finding out the best-performing funds, top lists, etc. They focus on the wrong things. And I think small investors remain small for such reasons.

Real money is made when your allocation is right. And that too at the right times. Getting the right amount of money in equity (% allocation) is significantly more important than just being in a top equity fund with a very small investment.

And Stable Asset Allocator can really help you with your asset allocation decisions.