asset allocation | Ranjan Varma's Blog

Continuing on my previous post on How Asset Allocation is Like Marriage, here are some more thoughts. (Btw, if you don’t believe in the institution of marriage, skip this post. But do come back later

Marriage is a committment towards family and your social future. So is Asset Allocation. Towards your financial future.

Marriage can be an arranged one or a love marriage. (Even if you talk of a live in relationship, that’s a committment too) Similarly your asset allocation can be done in a number of ways.

In an arranged marriage, the parents try to match the kundalis. When it comes to asset allocation your risk profile is your kundali.

In a love marriage, you are focused on the one guy/girl you love. With asset allocation also, one may stick to one asset class like equity or debt only. For example, people who are into stocks scoff at the idea of investing in debt and people who are invested in debt may be scared of wading into stocks. They love their own asset class.

It’s a good idea to stick to the asset class you love and understand. The only problem is that of lack of diversification. Though you can diversify within your stock portfolio or spread risk over within your debt portfolio.

In any case, you need to work on your marriage even though they may be made in Heaven. So do you need to continuosly evaluate your asset allocation and do course corrections.

Do stay tuned in for concluding thoughts on Asset Allocation. It’s Part 3

Coming Soon! RupeeCamp "Financial Planning Workshop". "Join us"

Welcome back! Join me on this journey to improving our financial IQ and sharing what we know. Updates at RSS feed or Email. And spread the word please Thank You!

Share/Save

Every time someone asks me a simple question on where to put his/her money, I fumble. I first try to hide behind jargons like, risk profile, risk appetite. If the guy persists, I use the ultimate jargon weapon: Asset Allocation Principles! . I also add in a firangi accent (picked up from my siblings) when I’m really interested to ward off further questions.

Most times, people are interested in getting a quick fix answer. But I always prod them to see the “big picture”. This “big picture” is your asset allocation. Simple.

Let’s begin with a few snapshot data. In 2000, the Sensex gave you a -26.1% return, Gold -3.33% while Debt Funds gave a +10.19% growth. But in 2006, it was +46.7 for Sensex, +5.28% for Debts and 35.0% for Gold.

And nobody knows for sure what 2009 or 2014 or 2020 will give returns on the three asset class. If the papers tell you that Debt funds are doing well and you take out your equity investments and put them into Debt, chances are that the equity is back to performing well and the debt funds nosedive.

Performance of Assets over Years

If nobody knows when and what returns will an asset class give, jumping from one asset class to the other is really a bad idea. Agree? Good, now I can tell you to go read all about Asset Allocation (Wikipedia). A few excerpts:

Asset allocation is based on the idea that in different years a different asset is the best-performing one. It is difficult to predict which asset will perform best in a given year. Thus, although it is psychically appealing to try to predict the “best” asset, proponents of asset allocation consider it risky. They say that someone who “jumps” from the one asset to another, according to whim, may easily end up with worse results than any consistent plan.

Academic studies have pointed out that replacing active choices with simple asset classes worked just as well as, if not even better than, professional pension managers. Also, a small number of asset classes was sufficient for financial planning. Financial advisors often pointed to this study to support the idea that asset allocation is more important than all other concerns, which the study lumped together as “market timing”.

Essentially Asset Allocation is your Investment policy. Depending on your own understanding of your risk profile, you need to finalize the best fitting pie for your debt, equity and other investments.

To start off, the thumb rule of asset allocation is based on your age. So if your age is X, invest X% in debt and 100-X% in equity. If you are a 25 year old guy, invest 25% in debt and 75% in equity. Always remember, it’s just the thumb rule.

In real day to day life, Asset Allocation can be related to getting a wife/husband for yourself. You need to give a serious thought when you are getting married. Not to someone your friend likes and approves, but someone you care for yourself!!

And once you get married, you can’t have a profile saying, “Married, Still Looking”.

The process of divorce is costly and painful and so is changing your asset allocation decision.

And if you are happily married, there’s so much joy in having happy children playing around. Stay invested with your asset allocation decision, and money makes more money.

Stay tuned for more updates. Part 2, Part 3

Share/Save