Quilts Rating: What’s Your Best Profit Prediction for 2023?

Mint annually does its famous ‘quilt’—a ranking of how content performed that year. It includes 10 asset classes – large cap, mid cap, small cap, international, real estate, G-sec, treasury bills, corporate bonds, credit and gold. How do you use this blanket for investment? It currently has data for 10 years, and the only theme is: unpredictable annual returns.

We broke this down quantitatively. Let’s say each year, you invest in the two best assets from the previous year. On average, your profit will be—average. But what if you went the opposite direction and, like a true value picker, invested in last year’s worst assets? Your returns will again, unsurprisingly, be average.

Some other facts we know intuitively about these asset classes are also true. Small cap, arguably the most volatile on the list, is almost always in the top 2 or top 2. Likewise, gold (the most boring) is often at the top or bottom 2. What’s the blanket not taking into account is a risk, because that is not possible in these table formats. T-bill is usually one of the worst rated, but that’s also because it’s the most stable.

When we invest our money, most of us seek to grow it at a reasonable rate and also sleep peacefully at night. Therefore, we are trying to optimize our return for each unit of risk we accept. Therefore, the first level answer to figuring out which assets to buy is really to take a portfolio approach and allocate between these assets based on your ability and willingness to take risks. . Then, the most convenient step to make sure you’re actually following this allocation is to go back periodically to rebalance and stick to your target weights for each asset. But what if we want to level up and be more dynamic in asset allocation? Let’s look at this year as an example of how to do this.

We started 2022 close to the peak of the stock market. Then came the Ukraine war, US inflation data, rising interest rates and oil price volatility. At some point, we also worry about China-Taiwan geopolitics, chickenpox, the UK causing debt contagion and the EU running out of gas. We are still worried about most of the above as well as climate change, nuclear escalation and China’s strange covid policy. While this may sound exhausting, markets experience it every year when a new disaster threatens our way of life. Most of this is short-term noise.

Thus, this year we have gone from ‘climax of greed’ to ‘peak of fear’. At one point Nifty fell 17% from its peak and has since recovered. The general rule that I like to follow is to feel ‘a bit disappointed’ when investing. This means that, at a time when I think all is murky and doom, it might be a good time to increase the allocation to that asset. Investing in stocks between February and June 2022 looks terrible — but it’s the only money making money in stocks this year.

It is important to note that ‘mild despair’ should not be confused with ‘extreme fear’. Most rational investors are also scared of the market highs, wondering if they should cash out. But that’s not a great strategy. For the past 15 years, the best strategy in the stock market has been “momentum.” Momentum basically means you invest in winners, i.e. companies whose stock prices are rising.

So when you see the 52-week high, the momentum strategy most likely requires you to invest more in the stock. Therefore, cashing out at market highs out of fear is not something I recommend. Think of it this way: Nifty is at 18,000 today. In the long run, will it get closer to 10,000 or 100,000? My bet is 100,000. Therefore, investing at a market peak does not mean suboptimal long-term returns.

But investing at the ‘somewhat desperate’ level is a great rule of thumb; when the asset type doesn’t look very attractive because there are too many obstacles. It’s like betting on BFSI or autos last year or on Nifty in February. There is no structural problem with the content, but you will feel uncomfortable for a while.

Therefore, my advice is to start with level one—where you use the blanket to define your assets and broadly understand how they work, stacking risk/volatility above this level to Find the right allocation for you. Then level two is opportunity – look at assets and sectors that give a sense of despair but are structurally fine. Those are good candidates for active weight gain.

Kanika Agarrwal is the co-founder of Upside AI.

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