Every trader/investor steps into the investing arena to either secure his future or to save taxes or both.
The ultimate aim is to make profits from investments.
And it is well known that keeping your portfolio healthy in the ‘green’ colour is a tedious task.
Therefore, choosing the right stocks plays a vital role, thereby keeping in mind fixed income instruments and other assets to maintain a healthy portfolio along with optimized risk-adjusted returns.
What Is Asset Allocation?
Wealth creation is a disciplined exercise that demands continuous and long term planned investments.
While investing it is crucial to be goal-oriented and start at the earliest to achieve long term financial goals.
Asset Allocations is one of the most important factors which focuses on your risk profile to attain your investment objectives.
It is an investment strategy that seeks to balance risk and reward by spreading assets across various categories such as stocks, fixed income instruments, cash, gold and real estate.
Always remember that two individuals with the same financial goals still differ in Asset Allocation because their risk appetite is completely different.
It might happen that, among the two the with higher risk tolerance might choose equity shares over fixed income instruments.
And in the same way, the one with a lower risk tolerance might tend to have more bonds in his portfolio than equity investments.
Also, the tenure of the investment makes a great difference in asset allocation.
The one with short-term financial goals will allocate more money towards bonds and other fixed-income securities.
Simultaneously, a long-term investor might show interest in an equity-oriented fund long term to meet his financial goals.
To know more about Risk-Management in your portfolio click here.
Foundation of Asset Allocation
The foundation of Risk Management lies in Asset Allocation.
Note that an investor’s overall risk profile comprises of risk attitude and thereby risk appetite.
A risk attitude is simply a psychological comfort.
The comfort we feel even during market volatility and when the investor’s portfolio falls by several % (one digit).
It is an investor’s financial ability to tolerate losses in investment.
Asset allocation is not just a factor of your risk tolerance, it also considers an individual’s fundamental characteristics like age, risk appetite and asset allocation.
This is because an individual’s risk appetite is inversely proportional to his/her age.
With each passing year, the risk tolerance becomes lesser as an outcome of other financial responsibilities.
A young individual’s earning capacity is higher, and afford the risk of job switch or starting afresh for better job opportunities/experience to expand the income bandwidth.
However, when you are old or retired, our only hope for financial stability/source of income tends to be savings.
It handicaps our ability to take risks with our investments.
Thumb rule for Asset Allocation
Age being the high priority barrier for asset allocation, needless to say, the proportion of equity as a component of your portfolio as these investments offer a higher return at a greater risk.
An investor can start equity allocation by subtracting their current age from 100.
This means as start seasoning, your asset allocation needs to be shifted from equity funds towards debt funds and fixed-income investments.
Let’s consider a live example, for an IT professional who is currently 25 years of age, the portfolio might have 75% of equity-oriented investments and the remaining 25% among debt funds and fixed income securities.
The investor might gradually shift from equity to debt investments as you approach retirement.
This aids in driving towards a systematic transfer plan (STP) to transfer your investments.
With asset allocation, you can make sure that your investment portfolio is properly diversified.
You want to make sure that your investment money is not concentrated in one or two stocks in one or two sectors. Ideally, you want assets to be diversified into non-correlated assets.
Benefits of Asset Allocation
- Stabilize volatility in your portfolio
Even if the market is highly volatile, the turbulence effect in your portfolio is minimized, if your portfolio has undergone diversifying with adequate asset allocation. This helps reduce panic selling.
Diversifying a portfolio is the first step in Asset allocation. To more about it click here.
- Unwanted drawdowns
The maximum pulls your portfolio will experience is during bear markets and it might happen that you may become in case the corrections last longer. With asset allocation, you don’t need to worry because your maximum pulls will be lower than simply putting all of your money in one or two investments. Which is practically manageable. Which means you can have a peaceful night’s sleep.
- Performance during Bull Markets
Note that when your portfolio is diversified and proper asset allocation is practised, there are higher of exposing your money to a bull market.
Such a portfolio tends to perform better in the Bull Market and you would be loaded with profits!
- Protects against the inevitable
With the recent Stock Market Crash in 2020 (COVID crash), with proper asset allocation, if you had practised asset allocation the effects of such uncertain crashes can be prevented and your portfolio can be saved from huge unrealized losses.
What about your Portfolio, is it diversified, Asset Allocation is done?
Want to master asset allocation?
Consider investing with Jarvis Invest portfolios.
We take care of your portfolio like a baby!
We have our own Artificial Intelligence, Jarvis, which does extensive research and have created a customised balanced portfolio according to your individual parameters designed to survive and thrive in almost any market condition.
Until next time…