How to maximize portfolio returns when an asset class becomes expensive

Equities have been corrected from their recent highs. Nevertheless, most stocks in the overall equity market are trading near their lifetime highs. To put it simply, the equity market remains expensive. For investors who have recently started investing, their equity portfolios are likely to have grown. However, this trend is unlikely to continue in the future.

What to Do When Your Asset Class Turns Expensive

The equity market has corrected from its recent highs. However, if you look at the overall equity class, most stocks are trading near their lifetime highs. In short, the equity class is still expensive. The majority of asset classes are trading near their peak levels. Investors who have recently started investment may have seen their equity portfolio grow. 

However, the same trend may not continue going forward. So what should investors do in such a market? 

Below are some ways to navigate through the expensive market:

1.Rebalance your portfolio -

You would have invested in the different asset classes as part of asset allocation. For example, you have different allocations in small, mid, and large-cap stocks within equity. 

Assume last year you had an allocation of 60%, 25%, and 15% in large, mid, and small-cap stocks. However, the small and mid-cap has grown significantly in the last year. Hence, your existing portfolio could be - 45%, 35%, and 20% in the same order. Therefore, it is time to rebalance your portfolio. It means you will book profit from small and mid-cap and re-invest in large-cap stocks so you can have asset allocation the same as last year.

2.Lower future expectation -

The kind of returns investors have seen post-Covid, they will not get the same returns in the future for sure. Hence, lower your expectation for the future. Experts say the current year will give investors negative or flat returns. Set your expectation accordingly.

3.Study the macro-environment -

A lot is going on in India, and at the world level, you should study the events. For example, the inflation in the US is at 40 years high, and then there is a Russia and Ukraine crisis. These events, if gone wrong, can change the market's direction completely. Hence, you study and track all such events. If an opportunity arises, make most of it. Don't panic and sell everything if the market goes south because of these events.

4.Diversify across assets -

You should not invest only in equity class. If you have not invested in another asset class as of now, it is time to start doing it. You should invest in debt and gold as well. You should have 5 to 10% of your total portfolio in gold. Like you did portfolio rebalancing within equity, you can do similar rebalancing at the portfolio level among different asset classes. So here is what you should do - if you don't have allocation in debt and gold, do it now. If you have and the percentage has gone lower since equity has out-performed other investments, rebalance your portfolio.

5.Average out your cost -

The market is volatile currently, and it will give you many opportunities to buy a good stock at a low price. Use these opportunities and continue to buy good stocks at a low price to average out the price of good stocks. Unfortunately, most investors panic in the volatile market and don't invest. They even stop their regular SIPs in stocks and mutual funds. It would help if you did not stop your existing investments. Instead, make use of dips to your advantage.

Also Read: Direct Mutual Fund Or Regular Mutual Fund: Which One To Choose and Why?


We hope you will follow the above steps and come out as a winner in such type of market. We wish you all the best in your investment journey.


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