The importance of automating investing rules
Mutual Fund in the 1998-2000 bull run. Arora had posted a screenshot of the Zee Entertainment stock price chart from 25 years ago, from January 1998 to April 2000. During this period, the Zee stock went up from Rs.4.58 to a peak of about Rs.778 (adjusted for a split) on 24 February 2000, and then collapsed.
The tweet read, ‘Those were the days… it was the top holding in Alliance Funds through this bull run.’
In response to the tweet, someone asked when and why Alliance had sold the fund. Arora replied that they had to sell every day for two years because the stock comprised 10% of their holding, which was the limit for maximum exposure of a mutual fund in a single stock. Eventually, when the stock was falling hard, they got out at about 30% dip from the peak.
Remember, this stock went up 16,800% during that period.
What happened to Zee is uninteresting today because such peaks and valleys are seen in the price history of many stocks. The interesting part, which is relevant to all of us who invest in stocks, is that a simple rule, that enforced diversification and asset rebalancing, was instrumental in the fund doing very well out of the stock. When an investment is going up sharply, the natural tendency of an investor is to hold on to it and, perhaps, invest even more.
This feels like the best possible option to maximise returns. However, in the excitement of daily rise in prices, it’s easy to forget the basic principles of investing.
Even though the above example involves a single stock, it is a good way to understand asset allocation and rebalancing in stocks and fixed income as asset classes. If you are a saver or casual investor, you may not be familiar with asset allocation and asset rebalancing.
