20/20 Hindsight: What to do in 2021

The year has ended and all predictions (astrology included) for the end of the pandemic have come to naught. World markets fueled by the US Fed continue their upward march in the shadow of trade tension and Chinese information clampdown leading to fears of a bubble burst.

In life, as in investments, we all look for certainty (or as much of it as possible) and our mental state is fueled by an obsession to know ‘what’s next’. Before the advent of financial advisors (née managers), there were priests and soothsayers whose job was to help make sense of the unknown. Their real job was to help their clientele ignore the concept of probability - the chance an outcome is possible.

This begs the question: will the markets go up? Will there be a crash? and what are the odds on either of these events? Frankly, no one has the answers - some market expectations can be gleaned from long- and medium-term derivatives (Exchange-traded and Over the Counter - OTC ones) as well as the price movement in long term bonds, both of which are useful for institutions and institutional trades and do little to allay concerns of individual investors.

The concept which does provide an answer to these questions is asset allocation and management thereof. But you ask, everything went up and then everything went down in the pandemic-initiated volatility? So, what is the point of it all?

60/40 Portfolio is dead

Anecdotal (more recently in the past few months) and empirical longer-term evidence suggests while correlations do break down in euphoric or inclement market conditions, allocation models have held their own since the advent of modern portfolio theory.

The exception to this is the demise of the 60:40 (Debt Equity). Time and again we have seen (just in the last decade) that simply owning debt plus equity will not save the portfolio nor will it give a great return as investment managers fealty to corporate bonds has led to significantly poor performance in the so-called ‘balanced funds’ as well as debt funds, for example in the ongoing Templeton saga.

A good portfolio today would include other asset classes such as Real Assets (REITs InVits etc. in some shape or form), commodities including Gold, International investments (which have an additional currency exposure – protects against the depreciating rupee notwithstanding the current stability/appreciation).

Real assets are a new and interesting class for Indian investors that produces consistent cash flows (and payouts), makes use of conservative leverage, and is a nice hedge against inflation. However, investment is needed to be weighed against overall investment in Real Estate especially for homeowners with more than one property.

Digital assets

One asset class that has caught the fancy of institutions and individuals alike is cryptocurrency aka bitcoin. A relatively new, Bitcoin has seen values surge to $20,000 only to crash to below $3,500 only to skyrocket in the pandemic liquidity.

There are two problems that have prevented widespread adoption: Central bank and regulatory reluctance and certain security generally required for retrieving assets. According to an Investopedia article from 2019, 20% of bitcoin is lost and unrecoverable. Generally attributed to lost passkeys, and, in an anti-government world of bitcoin, you cannot file a claim for lost or damaged currency. Such problems may be negated as regulators finally start approving the first bitcoin trusts, providing safeguards to investors.

Bitcoin notwithstanding, a standard review and rebalances as well as the reallocation process would have held its own even during the darkest days of the March meltdown. As always, use professional help and consider ETFs on a platform for portfolio management.