Asset Allocation
Assets are of two types. Buildings, land, paintings, gold etc. are physical assets. You can feel and touch them. Shares, debentures, mutual funds, fixed deposits, and bank accounts are all financial assets. Asset allocation is the ratio in which you invest in the assets mentioned above.
The above graph compares the 10-year trend of the nifty 50 index (a benchmark of stock market performance) with gold. (The data is normalized to 100 on January 1, 2011)
If you had invested back in 2011, the graph shows that gold has given better returns than the stock market. But, look now at what you would have observed in 2018 – gold seemed to be the wrong choice.
Many people have tried to ‘time the market’ – invest when prices seem to be at the lowest - and failed miserably. This is why investing in a single asset class is not advisable. Asset allocation is the key to safer investments. Having a proper mix of assets ensures that the losses incurred by one asset are overcome by gains from the others.