Is Your Portfolio Lying to You?

Unpacking the Myth: Is Equity Always King?

We've all heard the mantra: equities always outperform debt in the long run. It's a cornerstone of investing advice. But as the DSP Netra data reveals, the reality can be more complex, with periods where bonds and other asset classes take the lead.

This challenges the conventional wisdom that debt has no place in a portfolio.

Three Eras of Equity Underperformance

The analysis highlights three distinct periods when equity lagged behind debt, offering a crucial reality check for investors:

1. 1986 - July 1990: During this time, high double-digit interest rates fueled rapid growth in the debt market (see the image below). Equities struggled to keep pace, showing that a strong bond market can outshine stocks, especially when interest rates are high.

2. April 1992 (Harshad Mehta Peak): Following the peak of the Harshad Mehta bull run, the Sensex entered a prolonged slump. It took an agonizing 15 years for equity returns to catch up with what a debt investment would have yielded (see the image below). This period underscores the risk of investing at inflated valuations (e.g., Sensex P/E of 55), as it can lead to a long recovery period.

3. 2008 Financial Crisis: After the 2008 highs, a market lull set in (see the image below). It took a decade—from 2008 to 2018—for equity gains to match the returns from debt. This demonstrates how significant market tops can lead to extended periods of underperformance, where other asset classes like debt provide more consistent returns.

These examples show that equity's outperformance is not a smooth, uninterrupted journey. It comes with periods of significant pain and underperformance.

The Power of Asset Allocation 🤝

The key takeaway isn't to perfectly time the market—a notoriously difficult feat—but to embrace strategic asset allocation. Trying to tactically switch between asset classes is a high-risk game that few can win consistently. Instead, a diversified portfolio with a sensible mix of equities, debt, and perhaps other assets like gold, can help you navigate these cycles. This approach allows you to benefit from whichever asset class is performing well at any given time, mitigating the "pain" of prolonged underperformance in a single asset.

Key Takeaways:

1. Don't Dismiss Debt: Debt isn't a "useless" asset. It can provide steady returns and act as a crucial ballast in your portfolio, especially when equity markets are struggling.

2. Valuations Matter: Investing near market tops (e.g., high P/E ratios) can lead to extended periods of underperformance. Be mindful of valuations.

3. Personalize Your Portfolio: Your ability to sustain market pain for 3, 5, or even 10 years depends on your personality and financial goals. A portfolio should be a reflection of your risk tolerance, not just a blind pursuit of the highest returns.

What To Read This Week ?

Today’s Market Update

The week and the month of August have ended, but sadly there is no good news for the markets. The Indian markets continue to reel under selling pressure and are now very close to key support levels. Unless some fresh announcement comes in, it looks like these supports may break soon.

The only small positive is that the government has finally opened the door for talks. It seems like the realization has come that India cannot afford to go against the U.S. completely and must agree to a middle path. This is at least some relief for investors as negotiations may bring stability.

• The Nifty closed down 0.3% today. There was some recovery during the day, but by closing, the index was again near the lows.

• Nifty Next 50 also fell 0.3%, Midcaps slipped 0.55%, and Smallcaps ended 0.32% lower.

• Nifty Bank attempted a comeback but still closed down 0.31%.

• While equities stayed weak, gold once again proved its strength. Gold in INR terms touched ₹10,239, marking an all-time high on daily, weekly, and monthly charts.

Other Market Triggers

• In short, there was no sector or pocket that could escape the selling pressure. Reliance, HDFC Bank, Infosys, Tata Motors, and Mahindra & Mahindra were among the large stocks dragging the market down.

• On the other hand, ITC gained 2.2%, Bharat Electronics rose 1.5%, and Shriram Finance also added 1.5%.

• CG Power stood out with a sharp 4.5% rally, breaking out of a long flag pattern and showing strong momentum.

What to watch next ?

• Nifty is now near the 24,400 zone, which should act as support next week.

• After being beaten down for the last five-six sessions, the absence of late recovery is a worrying sign.

• On Tariff issues, alternate markets are being explored by the Government & it will take time, and industries suffering right now may not be able to hold on.

• For many factory and MSME owners, this feels like another Covid moment where orders have dried up and survival is tough.

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