50/50 - Best strategy for long-term investment

INDIAN stock market and its various indices are witnessing some unprecedented bull runs but this also crops up a catch-22 situation in investors' mind - whether to put extra money or hold it for time till some correction happens and share bazaar becomes stable? This is a very natural question since whenever such all-time highs are witnessed, it poses a risk of losing money as well.

Now, just remember the time - March 2020 and some months after it - when the lockdown was put in place in the wake of Covid-19 pandemic to contain the coronavirus spread. At that time too, stock markets were witnessing new lows every day but investors were struggling with a huge dilemma whether to put extra money or not since as an investor, one always waits for another low level so that he/she can reap hefty returns once the market bounces back.

Now, as a stock market investor, what should you do in such share bazaar scenarios of all-time highs and all-time lows and the positions in between the bull runs and bear runs?

Investors should follow the 50/50 investment strategy of American economist Benjamin Graham. So, what is this 50/50 investment strategy? How does it work? What are its benefits?

As per this formula, investors should invest 50 per cent of their money in the equity market and 50 per cent in the debt market, and balance it from time to time.

For example, if an investor wants to pumps in Rs 1,000 in total in the stock market, then he or she should invest Rs 500 in Debt and Rs 500 in equity.

After a particular time period, there could be two scenarios - One - your investment in debt grows to Rs 510 vs original Rs 500, and your investment in equity becomes Rs 530 vs original Rs 500. Now, your total investment value stands at Rs 1040. Further, to balance the debt vis-a-vis equity ratio of 50:50, as per the investment strategy, you have to withdraw Rs 10 from equity and invest it into debt to make it again a balanced with 50/50 investment strategy.

Now, let's focus on the second scenario. Let's assume if you get negative returns from equity or even lesser returns from the money you had put in debt; for instance, -4 per cent returns have been fetched from equity investment and your total market value of funds in equity stands at Rs 480. In this case, you have to withdraw Rs 15 from debt and invest in the equity market; this will make Rs 495 in both equity and debt, and that's what our ideal approach was of 50:50 debt vs equity investment.

An investor should always review his/her portfolio from time to time to reap best returns from the market with the help of the balanced approach of 50:50 investment strategy.

Moreover, let's take a look at benefits 50:50 investment strategy. Majorly, there are 3 benefits of the 50/50 formula.

First of all, your investment portfolio always remains balanced because your 50 per cent investment is in the debt market.

Second, when the equity market is at the top levels or witnessing new highs, your portfolio helps you fetch more returns. And, using this strategy you a get a peace of mind by booking some part of the profit from equity's investment lot and divert some funds towards debt investment in order to balance portfolio as per 50:50 investment approach.

This strategy gives you bigger chance to reap profits and helps you save money by no losing all profits, in case market slumps down to lows from highs.

Third, last but not the least, when the equity market is bearish, then using this 50:50 investment strategy you may always withdraw funds from debt and divert it to equity at cheaper levels. And, ultimately, using this strategy you buy equity at a low level and sell at a high level for booking big profits in future.

Various market investors use different ratios depending upon their risk appetite, but 50:50 debt vis-a-vis equity is the best ratio if you are new to the market or beginner in terms of share bazaar. Once you gain knowledge, you can change this ratio with your stock market's bull and bear experiences.

(The author is Vice-Chairman of GCL Securities)