Asset Allocation

The most talked-about sentence in 2020, COVID hit year, in the world of 'Personal Finance' was Asset Allocation. Is this the first time that this word, sentence or piece of a puzzle was coined? Definitely not. Asset Allocation is core to Personal Finance, 'Do not put all your eggs in one basket.' A person who does this prudently is a person who is able to succeed and create wealth in the long run.

So let us understand what Asset Allocation is all about. In simple words, Asset Allocation is investing across multiple types of instruments for a given time horizon (of course matching your goals and risk profile) so that we have better risk-adjusted returns. Wow! I tried to make that as simple as I could. Let me try that again. In a layman term Asset Allocation is all about, putting your eggs (money) in multiple investment baskets (example, Gold, Debt, Equities, etc.).

What Asset Allocation typically does is that, it helps to balance out between Equity (Domestic and International), Debt and Gold at various times in the market and thereby ensuring that an Investor gets a better risk-adjusted return in the long run. The basic principle of Asset Allocation is to help the investor to stay in the Market (TIME) versus TIMING the market.

See the table below which helps us to understand the performance of various investment products over a period of time.

As a layman investor, it becomes very hard for us to make this choice. How do I go about doing my asset allocation? Do I put 100% into Equity or should I follow the principle of 100 minus Age = Equity? There are quite a few questions that creep into one's mind and then we are confused, so much so, that we do NOTHING about it.

Since Personal Finance has the word, PERSONAL in it, I always state that Asset Allocation is personal to a person. Of course, you could have certain thumb rules if you want to go about it, but having said that, it's not a given. Take an example of 2 people, let's call them A and B. Both A and B have an income of 10 lakhs p.a., both are 30 and unmarried. However, A is working for himself, whereas B, has his family dependant on him (parents and siblings). Does this mean that we can go with the thumb rule of 100 less age = Equity for both A and B? But of course not. A and B although are similar in many ways, but are different when it comes to their PERSONAL life. This is a very crude example, but yet, an important one for us to understand that there is NO RIGHT or WRONG, it's JUST PERSONAL.

So does this mean that Asset Allocation is a ONE STOP SOLUTION? Definitely not, it is a process, a journey, that one has to undertake during the lifetime of his goal. It's not something which you do one day and forget for the rest of your life.

The most simplest and easiest way to ensure that we have a great mix of all is to start investing with a Dynamic Asset Allocation Fund. These are simple solution-oriented funds, where the Fund Manager decides on your behalf, where to invest your money at what point in time. Like I keep on saying, 'You do not go to an Italian restaurant and challenge an Italian chef in his signature dish'. That's his job, day in and day out, he is known for his cooking just the way you do your work back at home.

The reason why I have published this article was to make one just understand the simple concept of Asset Allocation. There is so much information on the net available if you would like to know more about asset allocation. But is mandatory for us to understand this concept.

As an end note, I would like to clearly state that, ALL of EQUITIES may not be GOOD, just like ALL of DEBT or GOLD is not good either. A combination of these asset classes is what actually CREATES and BUILDS wealth in the long run. Stay FOCUSED. Do not time the market, but spend TIME IN THE MARKET. Here Market refers to your investments goals.