2020 has been an eventful year for everyone, especially for the capital markets encompassing all asset classes. Investors realised how increased volatility from unpredicted events could whiplash their portfolio values. Such episodes often trigger immediate emotional reactions (fear/greed) from investors leading to hasty portfolio rebalancing decisions misaligned with their long-term financial goals.

An investment plan incorporating risk and return objectives, liquidity needs, time horizon, tax and legal requirements, help prepare asset allocation plans ideal for investors. These plans highlight right products for taking exposure in relevant asset classes like equity, fixed income, gold and alternatives.

Example: Investors who sold in panic during the early days of the pandemic, in March-April, when uncertainty was at its peak, are now repenting. They missed out on one full equity market recovery. Following the sharp market correction, their equity allocations would have dropped below levels outlined in their plans. It would have forced them to rebalance their portfolio in favour of equity.

Time in markets is more important than timing the market as it helps investors avoid short-term noise and focus on long-term goals.

Equity markets are in a sweet spot – but expert guidance would be helpful in long-term

Equity Index valuations are at elevated levels relative to long-term averages. But improving macro growth dynamics driven by rapid vaccine progress and positive corporate commentary led to healthy earnings upgrades. This is further supported by the massive global liquidity led by easy monetary and fiscal policy. Higher than expected inflation would also keep real rates in negative territory in medium-term making bonds unattractive. We believe equity markets are in a sweet spot. This view is further supplemented by "There Is No Alternative" (TINA) narrative.

COVID-19 led lockdowns forced individuals to sit at home, providing them with ample time to explore new tech-enabled direct equity trading platforms. Data reveals that millions of new trading and demat accounts were opened in the past three quarters. Retail participation in equity markets also jumped from 55 per cent to 70 per cent before falling back to 60 per cent. At the same time, mutual funds have seen lumpsum equity outflows from domestic investors. While the deepening penetration of capital markets is a healthy sign for any economy, investors must not get swayed by their recent investing performance. Professional money managers have gained experience from multiple market cycles and have expertise regarding fitment of investment products in investors' financial journey. In the long-term, it is always fruitful to take guidance from experts.

Keep room for alternatives like global and gold

In addition to volatility, investors learned the importance of two frequently ignored asset allocation choices – gold and offshore or global investing. We believe gold is unlikely to reap huge gains like in 2020. However, it is crucial to aloocate a small sum for gold as hedge against known or unknown uncertainty, volatility, and inflation. With a weak dollar and lower-for-longer interest rates, gold is also likely to benefit from its inverse relationship.

Global investing too has many benefits in addition to logical diversification perspectives. It not only provides exposure to multiple differentiated themes not available in domestic markets but also to currencies. Additionally, it reduces overall portfolio volatility. Investors must always have a strategic asset allocation towards international equity and take active tactical positions depending on changing market (country) dynamics and fundamentals.

The author is Chief Investment Officer at Validus Wealth

DISCLAIMER: The views expressed are the author's own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.