We have seen APS model of investment always yields better than Spot investment model in a balanced portfolio. We have also noticed MUF (Money Utilization Factor) benefit in case of APS model. Typically, APS model keeps money in the market only around 50% of the time in long term, so, it yields risk free interest (we have considered 4% ) while not invested.
Apart from above quantifiable benefits we have some more benefits which we can realize but we cannot estimate exactly.
Assume a worst scenario (which happens anyway in stock market periodically), after investment of Rs.50,00,000 in the market, it hit the bearish phase and started sliding down. It corrected up to 50% and the money invested in the market is now only worth Rs.25,00,000.
Well if the investor is not going to sell the stocks(technically booking loss) and wait for upward trend in the market then there is nothing to lose. Long term investments typically work like that. However, think a scenario if the investor needs money when market is at bottom, then there is no option other than to book loss of 50% to get cash.
Now think about APS model of investment. The moment any stock hits around 20% loss, it books loss and sits on cash. By the time market goes down to 50%, APS investors will be sitting on cash booking loss of 20% (Many might think it is a bad idea. Read the story of Mr.S.P.Tripathy & Mr.A.P.Sharma to know why this loss works in their favour). Following chart has explained the same in simulated way.
APS Vs. Spot Position In Falling Market
We have talked about falling market, what about rising and sideways market?
In case of rising market we have nothing to worry. At any point of time we will book profit only, if converting stock to cash. During sideways market, APS model will behave like long term average and it will be most likely sitting on 50% cash and 50% stocks. Thus, up to Rs.25,00,000 we will not require to sell any stock and beyond that we know the loss limit is 20%.
Conclusion: APS not only yields better returns in balanced portfolio scenario, but also gives more stable financial position.
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