Article

Portfolio adjustments in bull and bear markets

24 Jan 2020

If you cast a cursory glance at the Sensex chart since the Gulf War in 1991, there have been five distinct bull and bear phases. A typical bull phase rallies 90% to 500% while the typical bear phase corrects 20% to 60%. Check the Sensex chart below.

Data Source: BSE

While there is no hard and fast definition of a bull or bear market, the general global practice is to define a consistent rally of 50% or more as a bull rally and a correction of over 20% as a bear market. That brings us to the bigger question; how to make portfolio adjustments in such bull and bear markets.

Adjust your portfolio mix in a confirmed bull market rally

What are the adjustments you need to make when a bull market is confirmed? A typical bull market is marked by sharp profit growth or a spurt in liquidity. When you get confirmations, the first portfolio shift must be from value stocks to growth stocks. They are the most likely to outperform. Secondly, classify your portfolio mix based on a core portfolio and opportunities portfolio. While you don’t need to make changes to your core portfolio, your opportunities portfolio can be heavier on the sectors that are driving the rally.

Peg your equity exposure to Nifty P/E valuations

This is a fairly tricky decision to take. How do you decide if it is time to reduce exposure to equities? You can take the Nifty P/E as a proxy. If the P/E of the Nifty goes close to the upper historical end and the dividend yield moves closer to the lower historical band, it is time to move out of equities. While you don’t need to rethink your core portfolio, you must reduce the risk in your opportunities portfolio. Adventurous traders can look to convert equity  positions into options to limit downside risk.

MF SIPs work best when they are held through cycles

This is an important aspect to understand when you craft your bull / bear strategy. Investors often make the mistake of booking out of SIPs at the peak of the market and hope to restart the SIP when markets bottom out. That is exactly what you should not do. The equity MF SIP is designed to make the best of bull and bear markets. In bull markets, you get more value and in bear markets you get more units. It is this combination that ensures value creation over the long run. Your equity SIPs must be allowed to run through bull and bear markets for maximum impact.

Bear markets are the time to shift to defensive plays

No two bull markets have ever been driven by the same set of stocks. Hence, you must rush to exit these bull market drivers before the peak. When bull market valuations are showing indications of turning around, it is time to prefer defensives like FMCG, IT, pharma and food companies that are less vulnerable to economic cycles.

Futures and options are an important part of bear market strategy

Make the best of the dynamism and flexibility of futures and options to play the bear market. You can use put options to protect your portfolio and also profit from corrections in the market. The shift from bull to bear markets is accompanied by volatility. The idea is to make the best of volatile strategies like straddles and strangles at these points.

India is a structurally optimistic market and every bear market has been followed by a more vigorous bull market. How you play these critical event shifts; determines your portfolio performance!

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Portfolio adjustments in bull and bear markets

24 Jan 2020

If you cast a cursory glance at the Sensex chart since the Gulf War in 1991, there have been five distinct bull and bear phases. A typical bull phase rallies 90% to 500% while the typical bear phase corrects 20% to 60%. Check the Sensex chart below.

Data Source: BSE

While there is no hard and fast definition of a bull or bear market, the general global practice is to define a consistent rally of 50% or more as a bull rally and a correction of over 20% as a bear market. That brings us to the bigger question; how to make portfolio adjustments in such bull and bear markets.

Adjust your portfolio mix in a confirmed bull market rally

What are the adjustments you need to make when a bull market is confirmed? A typical bull market is marked by sharp profit growth or a spurt in liquidity. When you get confirmations, the first portfolio shift must be from value stocks to growth stocks. They are the most likely to outperform. Secondly, classify your portfolio mix based on a core portfolio and opportunities portfolio. While you don’t need to make changes to your core portfolio, your opportunities portfolio can be heavier on the sectors that are driving the rally.

Peg your equity exposure to Nifty P/E valuations

This is a fairly tricky decision to take. How do you decide if it is time to reduce exposure to equities? You can take the Nifty P/E as a proxy. If the P/E of the Nifty goes close to the upper historical end and the dividend yield moves closer to the lower historical band, it is time to move out of equities. While you don’t need to rethink your core portfolio, you must reduce the risk in your opportunities portfolio. Adventurous traders can look to convert equity  positions into options to limit downside risk.

MF SIPs work best when they are held through cycles

This is an important aspect to understand when you craft your bull / bear strategy. Investors often make the mistake of booking out of SIPs at the peak of the market and hope to restart the SIP when markets bottom out. That is exactly what you should not do. The equity MF SIP is designed to make the best of bull and bear markets. In bull markets, you get more value and in bear markets you get more units. It is this combination that ensures value creation over the long run. Your equity SIPs must be allowed to run through bull and bear markets for maximum impact.

Bear markets are the time to shift to defensive plays

No two bull markets have ever been driven by the same set of stocks. Hence, you must rush to exit these bull market drivers before the peak. When bull market valuations are showing indications of turning around, it is time to prefer defensives like FMCG, IT, pharma and food companies that are less vulnerable to economic cycles.

Futures and options are an important part of bear market strategy

Make the best of the dynamism and flexibility of futures and options to play the bear market. You can use put options to protect your portfolio and also profit from corrections in the market. The shift from bull to bear markets is accompanied by volatility. The idea is to make the best of volatile strategies like straddles and strangles at these points.

India is a structurally optimistic market and every bear market has been followed by a more vigorous bull market. How you play these critical event shifts; determines your portfolio performance!