In last 2 weeks, Nifty has corrected by ~10%. It is not the extent of correction but the speed of correction, which made many people raise the age-old question: Buy, Sell or Hold. Some of the possible thoughts popping in head can be as below:

  1. If the market start gaining the lost ground, we might miss the opportunity to buy cheaper
  2. If its going to fall more, I should wait and buy cheaper
  3. If the fall is going to be deep, should I sell the current holding and later on buy cheaper

This is also not the first time, when people asked me this question and I am sure it won’t be their last. The trouble is that everyone wants an answer as yes or no, very rare ones want to understand how to reach that decision for himself. if you are in the rare ones, you might gain some insight from the below approach else you can stop reading here itself.

The query for buy, sell or hold emerges from two angles: When you gauge that the market levels are dislocated vs your perceived value or you are sitting on losses in your portfolio (I have not seen any people asking should I sell, while sitting on 15%+ annualized returns). I have earlier covered in quite a detail about “When to sell your investments”, main points as below:

  1. When you require the cash for planned expenditure or emergency expenditure
  2. When you are optimizing for taxes: Managing the capital gain tax or Harvesting the tax loss
  3. When you made the wrong investments and you want to correct those
  4. When market levels are not in the correct valuation zone

If you want to sell because of the fourth reason, then don’t just sell it yet and probe further. The better question is “Do I need more or less equity holding in my portfolio vs the current holding” or even better will be to understand “How much Equity should I hold?”. Let me explain, why this is a better question with two examples:

Example 1: A 30 years old person in a stable job, significant corpus and no loans has all his portfolio in fixed deposits. Should he buy more equity, the answer in most cases will be yes though if he is new to equity that it might be suggested to start gradually and may be with a Dynamic Asset Allocation funds or Hybrid aggressive funds. Example 2:  Another 30 years old person in a business with irregular cash flow, significant corpus and have some business loans, has all his portfolio in equity funds. Should he sell equity, the answer in most cases will be yes though how much is still to be addressed.

How much equity should you hold depends upon for major parameters, below is my rough calculation:

{Risk appetite (0-25%) + Risk capacity (0-25%) + Market valuation levels (0-50%)} * Investment horizon (0 to 1)

Higher the risk appetite & capacity, more allocation to equity and depending on your time horizon short, medium and long. Market valuations should drive the other 50% allocation, which you can measure based on your barometer of choice my choice is Valuation index. Therefore, even if you have a higher risk appetite, capacity and markets are cheap for goals due next 1-2 years, you should have 0 equity allocation. Market valuations are just part of equity allocations required and not the only factor.

How should you calculate your equity allocation?

  1. You can check the risk appetite based on 5 simple questions and multiply your sore with 5%.
  2. You can calculate your rick capacity based on the 7 main parameter and multiply your score with 5%
  3. Lastly Market valuations can be accessed based on VI (5-1), 5 is cheap in green zone and 1 in case of red color. Multiply that with 10%

VI Index

Based on these parameters you get the % allocation to equities, now for the investment horizon you should multiply with a factor for 10 yrs far goal assume its one and for 1 year down the road its just 0.1.

Let’s take an example of Nikhil, a 35 yrs old, investing for his retirement 20 years down the line. His risk appetite is moderate 2.5, risk capacity is 3 and based on above chart the market valuation levels are at 2. His equity allocation should be 47.5% {(2.5 *5% + 3*5% + 2*10%) *1}. Now if the current equity holding is less than 47.5%, he should invest more and in vice versa situation sell some equities. If it’s closer to 47.5%, then just Hold. Follow this during the re-balance once or twice a year can make you a much better investor in long term and taking emotions completely out of picture.

Do let me know, how much equity should you hold and are you going to buy, sell and hold in the comments section or mail us.