Dalal Street Investment Journal – July 20, 2019

134 DALAL STREET INVESTMENT JOURNAL I JULY 22 - AUG 4, 2019 DSIJ. in^

T

he most important determinant of an investor's long
term investment results is composition of assets or asset
mix in the investor's portfolio. Statistically speaking, as
the investment horizon gets longer, asset allocation emerges as
the dominant factor driving investment results. Thus, in any
financial planning process, arriving at an appropriate asset
allocation is the most important decision variable.

What is asset allocation & how does it work?
Asset allocation is the process of deciding how to divide your
investment across several asset categories. The asset categories
here can be equity, debt and/or gold (or may be real estate,
commodities, etc). The goal of asset allocation is to minimize
volatility in one's portfolio while maximizing return. The
process here involves dividing your investment among asset
categories that do not all respond to the same market forces in
the same way at the same time.

How different assets behave
The world of investments resembles our life-both are
unpredictable. Winners keep on rotating each year when it
comes to investments. What may be the best asset class today
may not be the best tomorrow. This is because different asset
classes react to an economic development in different
manner.

Financial Planning

MF Page - 06

Getting Your

Asset Allocation Right

For more information contact :

Nilakshi & Christopher Louzado, Partner, Intrust Advisors LLP n Email: [email protected] n [email protected]

Nilakshi & Christopher Louzado

Partner, Intrust Advisors LLP

Stocks/equities do well under vastly different conditions

compared to fixed income/debt investments. Equity market

tends to generally perform well in expansionary economies, i.e.

lower interest rates, more money supply and increasing

demand. On the other hand, bonds tend to generally perform

well in contracting economies, i.e. higher interest rates, falling

money supply and decline in demand. Given that the economic

conditions are not static in nature, the attractiveness of an asset

class will tend to vary from time to time.

As a result, if your investments are concentrated in a particular

asset class which may not be performing very well at a

particular point in time, the entire portfolio is bound to be

impacted. Having a diversified portfolio with holdings across

asset classes ensures that the gains in a particular asset class will

help offset some of the losses in another asset class, thereby

helping to reduce the negative impact of the laggard on the

overall portfolio.

Ideal for long-term

When investors are told they have to invest for the long-term,

some are confused as to why 'long-term'. This confusion is

understandable. When we look back at history, we know how

different asset classes/categories have performed each year. But,

looking ahead is a much more difficult task. This is where asset

allocation plays a defining role. By sticking to simple principles

of asset allocation, we can practice long-term investing and

create wealth.

Imagine you had `1 lakh to invest at the end of 2004. Your time

horizon was 10 years. So, you invested `1 lakh for 10 years, i.e.

2005 to 2014. Below is a live example of how your investment

journey would be if you invested only in stocks, only in bonds

and a mix of stocks & bonds (65%-35%). As you can see, the

asset allocation approach gives you returns

which are in the middle and also a smoother investment

journey than the other two approaches.

How to go about asset allocation

The number of asset categories you select for your portfolio and

the percentage of portfolio you allocate to each category will

depend on a variety of factors. Among these, the investor's

tolerance for risk, investment goals, how long one is planning

to stay invested-all of these factors matter. For the retail

investor, getting all of these aspects sorted and making

appropriate investments may not be an easy task.

Since determining an appropriate asset allocation is the single

most important investment decision because of its high impact

nature, it is important to get this right. Seek the help of a financial

planner who will help you reach the optimal asset allocation as

per your financial goals. Also, be sure to periodically review your

portfolio with the financial planner to ensure that your chosen

mix of investments continues to serve your evolving investment

needs as your circumstances change over time.