‘It is not the worst time to reduce one’s small cap allocation’
In war, prepare for peace; in peace, prepare for war – Sun Tzu, author, 'The Art of War'
I know that Warren Buffet’s favourite holding period is, forever. However most of us don’t have that kind of luxury as we have goals to fulfill. Also, ‘timing’ the market isn’t celebrated enough. On the contrary, almost looked down upon. So, here I am, asking you to do just that: ‘time’ the market. Humour me for a while.
Why should you reduce your allocation into equity in general, and small cap in particular?
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Valuation logic : The whole investing ecosystem breaks into a chorus to buy, when there is a significant correction in the equity markets (as in Mar 2020, 2013 or 2008-09). These calls are made on the valuation gap that is created by such falls, vis-à-vis the long-term fair valuations. However, similar calls are not given to reduce equity allocations, during periods of over-valuation. Current levels are 15-20% expensive, compared to long term median valuation
Money chasing returns : The inflow into small caps has increased significantly in the last few months, which clearly demonstrates that investors are chasing higher returns. This is exactly opposite of ‘buying low and selling high’ (which itself is a utopian concept). Look at this net inflow in mutual funds (in crs) data from AMFI :
If lower-than-expected return worries you, higher-than- expected return should also bother you: If 8% CAGR or below over 5-6 years from equity bother you, then current returns should also be a cause for concern. Most small cap funds have delivered between 19-25% CAGR in the last five years (as on 30th September 2023). Else, we are
