Last Updated on October 14, 2022 at 8:23 am
A reader asks, “Is this a good time to Invest in NASDAQ 100 and S&P 500? As both indexes have fallen around 25% to date in 2022.”
The answer depends on your motivation and your appreciation of underlying risks. From the point of view of Indian investors, the US stock market has been on an upward trend since the 2008 post-crash recovery.
The majority of mutual fund investors in India were onboarded only after 2018 or so, and they have “diversified” their portfolios’ “international” (read, US) equity motivated by corresponding past performance.
So much so that many investors assumed that “long term” returns of these indices in INR terms have always been better than that of the Sensex or Nifty 50. This is incorrect:
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Not many investors appreciate that the NASDAQ 100 is a highly volatile thematic index. After it crashed in the 2000s, it was underwater for nearly 15 years. Are you ready to stomach this if such a scenario repeats?The S&P 500 also suffered the same fate for about 12 years after 2000.
International diversification is a tricky business. 1) Any measurable difference in the portfolio requires a good dose of exposure. Even then, most investors are incapable of measuring this. They took on a “small exposure” in the Nasdaq 100 or S&P 500 for the only reason that it was shiny. Such small exposures are unlikely to benefit regardless of how big a recovery they see.
2) International diversification can sometimes be in step (all markets crash together), then such benefits wane and sometimes out of step. These can be cyclic (with unknown frequency). The out-of-step movement is also cyclic (with unknown frequency). That is, sometimes US equity does better and sometimes Indian equity. This is, of course, how “diversification” is supposed to work. Most investors chase returns and brand their actions as diversification.
3) Such portfolios require maintenance. An investor holding 20% of the Nasdaq 100 would now hold about 15%. Most investors will not rebalance this and prefer to invest more each month. They would also hesitate to do the opposite. Rebalance from US equity to Indian equity when the former does well. The main reason is a fear of paying taxes.
4) The issue of AUM limits imposed by the RBI. As patriots, we strongly believe that the AUM limit of USD investments should not be increased soon. The stability of the INR is of paramount importance. It will also stabilise the Indian equity market, which is where most of our money is.
Our recommendations are:
US equity exposure is not necessary for a portfolio. Most people have small and insignificant exposure but spend too much time worrying about it. If FOMO has got the better of you (unhealthy), then these are some options (in no particular order):
- Invest systematically in an S&P 500 passive fund (avoid Nasdaq 100) within a set allocation but expect poor returns for a while. So do not go overboard. Do not invest lump sum amounts.
- Invest tactically. Start investing when there is a momentum reversal (the market starts moving up) and pull out when the momentum dries up.
- See, for example: Testing a double moving average market timing model (part 1): Nasdaq 100 and
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- This has risks which must be understood before proceeding: A risk in market timing that 122 years of backtesting failed to reveal!
- Consider using an (Indian) equity fund holding international equity. Yes, there are limitations here because of AUM limits there is still some wiggle room available.The pros are the fund manager takes care of rebalancing and tactical allocation without tax incidence. Also, the net tax is lower. The cons are the risk of active fund management and concentration risk (the fund weight has to be high for international exposure to be high). This is an expensive choice but is way simpler over the long term.
Whichever option you choose, (1) do not assume buying the dip will make a big difference to the wealth you create. The next bear market will balance it out! (2) Do not expect immediate recoveries. Past risk is representative of minimum future risk.
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