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How do you allocate resources in your portfolio?

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Resource allocation is a key aspect of portfolio management that involves deciding how to distribute your assets among different investment categories, such as stocks, bonds, cash, and alternatives. It can help you balance your risk and return, diversify your exposure, and align your portfolio with your goals and preferences. In this article, we will explore some of the factors and methods that can guide you in allocating resources in your portfolio.

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Nitai Utkarsh

Single Family Office Leader | CFA | IIMK | IIT (BHU)
Johncy George

Head - SAM @ L&T Technology Services

1 Factor 1: Risk tolerance

Your risk tolerance is the degree of uncertainty and volatility that you are willing to accept in your portfolio. It depends on your personality, financial situation, time horizon, and objectives. Generally, the higher your risk tolerance, the more you can allocate to riskier assets, such as stocks, that offer higher potential returns but also higher fluctuations. Conversely, the lower your risk tolerance, the more you should allocate to safer assets, such as bonds and cash, that offer lower returns but also lower volatility.

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Nitai Utkarsh

Single Family Office Leader | CFA | IIMK | IIT (BHU)
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At times, it is difficult to pin a single risk tolerance level to an individual, especially if the individual is ultra-rich and has a complex financial profile. Such people often have multiple risk tolerance levels, each for a different goal in life. These goals may not be as simple and commonplace for them as getting a university degree or buying a house. It could be more on the lines of incubating a new business or donating to their favourite charities or acquiring a famous artwork but they are goals for sure, each of them needing a different risk allocation. It’s important therefore, for professionals to account for the possibility of multiple risk tolerance levels of individuals and families when they dig deep.

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2 Factor 2: Return expectations

Your return expectations are the level of income and growth that you aim to achieve from your portfolio. They depend on your financial needs, goals, and aspirations. Generally, the higher your return expectations, the more you need to allocate to assets that offer higher returns, such as stocks and alternatives, but also higher risks. Conversely, the lower your return expectations, the more you can allocate to assets that offer lower returns, such as bonds and cash, but also lower risks.

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3 Factor 3: Asset correlations

Asset correlations are the degree of similarity or difference in the performance of different asset classes. They range from -1 to 1, where -1 means that two assets move in opposite directions, 0 means that they are independent, and 1 means that they move in the same direction. Generally, the lower the asset correlations, the more you can benefit from diversification, which is the strategy of combining different assets that have different risk and return profiles to reduce your overall portfolio risk and enhance your return potential.

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Nitai Utkarsh

Single Family Office Leader | CFA | IIMK | IIT (BHU)
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Asset correlations aren’t as simple as they seem. Based on the kind of data that’s available, these can be quite confusing and inaccurate. Asset classes that aren’t regularly marked to market may not have their true return or risk parameters recorded and the last genuine transaction that can be used for valuation may have taken place a long time ago. This can lead to low levels of measured risk and even the correlations with other asset classes can be estimated to be lower than actuals. The resultant resource allocation therefore, can be quite inefficient unless one accounts for such valuation gaps and provides for it when calculating asset risks and correlations.

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4 Method 1: Strategic asset allocation

Strategic asset allocation is the method of setting a long-term target allocation for your portfolio based on your risk tolerance and return expectations. It involves choosing a mix of asset classes that suits your profile and sticking to it over time, regardless of market conditions. It requires periodic rebalancing, which is the process of adjusting your portfolio to bring it back to your target allocation when it deviates due to market movements. Strategic asset allocation is a passive and disciplined approach that can help you avoid emotional and impulsive decisions.

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Johncy George

Head - SAM @ L&T Technology Services
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To ensure optimal resource allocation in a software asset portfolio, organizations should start by conducting a comprehensive software audit, identifying all assets and their usage. Categorizing software based on criticality and business impact allows for prioritized resource allocation. Regularly review and optimize software licensing, eliminating redundant or underutilized applications, and negotiate favorable terms with vendors to reduce costs. Lastly, establish clear policies, collaborate across departments, and invest in robust management tools to maintain an efficient and cost-effective software asset portfolio.

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5 Method 2: Tactical asset allocation

Tactical asset allocation is the method of making short-term adjustments to your portfolio based on market opportunities and trends. It involves shifting your allocation among asset classes to take advantage of their relative performance and valuation. It requires active monitoring, analysis, and decision-making. Tactical asset allocation is an active and flexible approach that can help you enhance your returns and reduce your risks.

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6 Method 3: Hybrid asset allocation

Hybrid asset allocation is the method of combining strategic and tactical asset allocation in your portfolio. It involves having a core portfolio that follows a strategic asset allocation based on your risk tolerance and return expectations, and a satellite portfolio that follows a tactical asset allocation based on market conditions and opportunities. It requires a balance between discipline and flexibility, as well as a clear distinction between your long-term and short-term goals. Hybrid asset allocation is a blended and adaptive approach that can help you achieve the best of both worlds.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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How do you allocate resources in your portfolio?

1

2

3

4

5

6

7

1 Factor 1: Risk tolerance

2 Factor 2: Return expectations

3 Factor 3: Asset correlations

4 Method 1: Strategic asset allocation

5 Method 2: Tactical asset allocation

6 Method 3: Hybrid asset allocation

7 Here’s what else to consider

Strategy

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How do you allocate resources in your portfolio?

1

2

3

4

5

6

7

1 Factor 1: Risk tolerance

2 Factor 2: Return expectations

3 Factor 3: Asset correlations

4 Method 1: Strategic asset allocation

5 Method 2: Tactical asset allocation

6 Method 3: Hybrid asset allocation

7 Here’s what else to consider

Strategy

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