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Asset Allocation

Asset allocation refers to diversifying investments across different asset classes like stocks, bonds, cash, and alternatives. Maintaining the proper mix tailored to an individual's goals, time horizon, and risk tolerance is more important for long-term returns than trying to time the market or select the best performing investments. The document emphasizes that markets are unpredictable and different asset classes perform better in different economic conditions, so a balanced portfolio through asset allocation is important for managing risk and achieving financial objectives.

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Rushin Savani
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50 views18 pages

Asset Allocation

Asset allocation refers to diversifying investments across different asset classes like stocks, bonds, cash, and alternatives. Maintaining the proper mix tailored to an individual's goals, time horizon, and risk tolerance is more important for long-term returns than trying to time the market or select the best performing investments. The document emphasizes that markets are unpredictable and different asset classes perform better in different economic conditions, so a balanced portfolio through asset allocation is important for managing risk and achieving financial objectives.

Uploaded by

Rushin Savani
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Be A Prudent

Investor

ASSET
ALLOCATION - A
Key to Financial Success
Introduction
If you have an opportunity to make your own team in IPL, what will you do? Take all the best batsman or make
a team of all types of bowlers or make a good mix of batman’s, bowlers and fielders.
To win a match it is important to have good mix of players with different skill sets. Similarly, in your portfolio
you need all kind of asset classes, which will perform in different market conditions. A good team mix can be a
mantra for winning a match and asset allocation can be a mantra for a winning portfolio.

What is asset allocation?


Asset allocation is the mix of different asset classes e.g. equity, debt, gold etc. in an investment
portfolio. The aim of asset allocation is to balance risk and returns in accordance with different
financial goals and risk appetites. Unfortunately, asset allocation is not given its due importance by
many investors in India and we see investment portfolios heavily skewed towards particular asset
classes without factoring in risk and return consideration.
Three Things to Remember about Asset
Allocation
1. Different Asset Play different roles

2. Markets are unpredictable

3. The Mix Matters


Different Asset play different role…
 Stocks for building wealth
 Bonds for income
 Cash for emergency reserves
 Alternatives for risk management
Markets are Unpredictable
Stay diversified: there’s is no telling which asset class will be the best
performing year to year
Annual returns of asset class categories
Return of different asset class – with Heat Map
Those who stayed invested in a
diversified portfolio throughout the
last decade fared well, despite
volatility along the way.
Growth of Rs.10 mn for diversified
portfolios

Conservative
Moderate
Aggressive

Bar chart for return from 2000 – base


yr to 2020 or 2022
The Mix Matters
Asset allocation is a Key determinant of Portfolio performance

An influential study revealed that the mix of asset classes explains


nearly 92% of the variation in portfolio returns….

Security selection . . . . . 4%
Market timing . . . . . 2%
Other factors . . . . . . . . . . 2%
Asset allocation . . . . . . . 92%
Based on Controversial Brinson Study,
‘The Determinants of Portfolio Performance’
(1986)
Find Return for Conservative, Moderate,
Aggressive portfolio

In terms of value, risk (Variance/ Std


Deviation) form 2000, 2004, 2008, 2012, 2016,
2020
Why is asset allocation important?

Risk and returns are directly related but risk is a double edged sword. If you take too little risk, you may not be able
to make the money needed for your financial goals. On the other hand, if you take too much risk, you will expose
your financial goals to uncertainties of capital markets. Right asset allocation means that you take the optimal
amount of risk to meet your short term, medium term or long term financial goals.

1. Irrational behaviour is very common in investing because greed and fear plays a big role in how we invest.
When the market is high, people put more and more money in stocks expecting market to go even higher. When the
market is low, people sell stocks fearing market to go even lower. Such irrational actions harm the long term
financial interests of the investors. An asset allocation based approach takes emotions out of investing and keeps
you disciplined.

2. Drivers of investment results


We have seen that investors spend too much time on trying select best performing schemes. But historical portfolio
returns analysis provides overwhelming evidence that asset allocation is the most important attribute of portfolio
performance.
3. Winners keep changing

Different asset classes outperform / underperform each other in different stages of investment cycles. Asset allocation
may ensure a degree of portfolio stability in different market conditions and may give good returns across investment
cycles.

4. Importance of Portfolio rebalancing


Different asset classes outperform / underperform each other in different market conditions; without rebalancing, your
asset allocation can deviate significantly from your target allocation.

How does Portfolio Rebalancing happen?

Let us understand the importance of asset rebalancing with the help of an example. Let us assume you invested Rs 1
lakh in the proportion of 70% equity and 30% debt in 1998. In the first example, you only did a one-time asset
allocation at the time of your investment. In the second example, you were rebalancing your portfolio every year to
bring back the asset allocation to 70% equity and 30% debt. If equity allocation exceeded 70% equity any year, you sold
equity and bought debt to keep asset allocation at your target. Similarly when equity allocation was below 70%, you
sold debt and bought equity to keep asset allocation at 30%.
Types of Asset Class

Cash and Cash


Fixed Income Real Estate Gold Equity
Equivalent
Factors Affecting Asset Allocation

Time Horizon

Risk Tolerance

Risk versus Reward

Tax saving

In real life, there are many assets which can not be fit into a
single Asset Class, meaning they are Hybrid Assets.
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Key Takeaways THREE:


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What Matters When Investing?
You can’t control the markets; timing is likely to reduce
return, nit add to it.
Investment results depends on investment behavior.
Successful investors take emotion out of investing
behavior with an Investment Policy Statement (Asset
Allocation)
Use a Personal Investment Policy Statement to guide your
investment behavior, shielding you from emotional
investing.

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