New Delhi. Investing people often talk about asset allocation. Even new investors are not unaware of it, but they also do not have complete information about it. For example, what is it, how to do it and what are its benefits? There is a saying quite famous in the world of investing “Don’t put all your eggs in one basket.” This is the core of asset allocation. The real investor is the one who understands its importance. Be it shares, gold, bonds or FD, investing in the right amount in all these is the real asset allocation. And the interesting thing is that even the world’s biggest investors tell this as the real secret of their wealth.
This is why asset allocation in the portfolio is very important. If your asset allocation is correct then your chances of getting better returns become stronger. Asset allocation is done keeping in mind several factors including the age of the investor, financial goals and risk appetite. Asset allocation is not just about distributing money, it is a kind of financial story where every character (asset class) has its own role. Some help you grow faster, some support you in decline and some strengthen the foundation of your portfolio. A good portfolio is one in which all three are present together in a balanced form.
Different formula for every investor
There cannot be the same formula for asset allocation for every investor. Every investor is different. His income, his age, his goals and risk taking ability. Therefore, there is no single formula for asset allocation. The investor has to choose the right mix according to him. There is no fixed pattern of asset allocation. Asset allocation is done on the basis of an investor’s financial goals, investment tenure, risk appetite and liquidity.
Suppose you are young, earn well and do not shy away from taking risks. Then a mixture of 70% equity, 20% FD or bonds and 10% gold may be best for you. This gives you the benefit of growth in the long run. On the other hand, if you are a medium risk investor and want good returns along with stability, then it is considered appropriate to invest 40% in equity, 40% in bonds or FD and 20% in gold. And if you want to be completely risk-averse, then a portfolio of 70% bonds/FDs, 20% equities and 10% gold will keep you sleepless nights.
Why is asset allocation important?
The advantage of asset allocation is that if one investment option is experiencing sharp fluctuations, the other one provides you stability. Suppose you have invested all your money in shares and the market suddenly falls by 20%. Your net worth could collapse in an instant. But if at the same time your gold portfolio is strong then it covers the loss to a great extent.
This is the real magic of asset allocation. When one asset goes out the window, another takes over. When the market rises, your equity stake goes up. And when there is a downturn, gold and bonds take over your portfolio. That means your money keeps moving forward slowly and continuously without any shock.
asset allocation strategies
Strategic Asset Allocation: This is an invest and forget strategy. Once you decide on asset allocation, you stick to the same asset allocation for a long time.
Tactical Asset Allocation: In this strategy, asset allocation is changed from time to time. This strategy works very well in the short term. The asset allocation fixed for a long period is not changed.
Dynamic Asset Allocation:This is an aggressive strategy of asset allocation. In this, the allocation is changed based on the market movements. This is the reason why those who adopt this strategy see rapid changes in their portfolio.
Be sure to review asset allocation
Just like cleaning the house has to be done regularly, similarly the portfolio also has to be cleaned. It is important to review asset allocation at least twice a year. Suppose you kept 60% equities, 40% bonds. But the market rose and now the equity becomes 70%, then you should rebalance. This is called re-balancing. If there is a fluctuation of more than 10% in any one asset class then it is necessary to make changes. This step makes your portfolio safe and capable of growing continuously.
