Asset allocation: a simple, easy and efficient way to allocate assets

Since February 2020, so much has changed in the world that one would automatically assume that everything would have changed for investors as well. Now, just as the covid virus ends, we have this war in Europe. While the war itself might have been a small regional affair like so many others that go unnoticed, the United States and its supporters made a determined effort to globalize its impact.

We have raging global inflation, currency turmoil, falling stock markets, central banks raising rates, Western sanctions, China’s ongoing difficulties, slowing demand and unpredictable recession in countries Westerners. Everyone’s investment strategy must surely change? Well, yes and no.

To understand why, look at the different phases of the viral reaction. From February 2020, there was first a big crash when it looked like the sky was falling. Lots of people sold and rushed into stocks. After that, it was a rollercoaster of different sectors and company sizes, with investors frantically searching for clues to locate some kind of map of the near future vis-à-vis the short-term and long-term impact of the virus. Even in the upswings of stock prices, investors have been hesitant in their convictions and based their decisions more on short-term guesswork and fear. As the virus receded, wars and sanctions began.

A side effect was that investor asset allocations went seriously out of whack. There are investors who rushed in and out of equity and then rushed back in haste. On top of that, there were those distractions from IPOs. First came “digital IPOs,” then . On top of that, inflation is now higher than the yields of almost all fixed income assets, which creates a different set of problems. The conventional answer to this – something I have advocated in the past – would be that investors should work to fix their asset allocations. This is an almost automatic reaction for anyone analyzing investments. Bad asset allocation? Different proportions of equities and fixed income than they should be? Fix it. Simple. But not really.

The reason is that hardly anyone can really do it as an individual. This is a real-world observation that may be contrary to general advice, but it is what actually happens. It is extremely difficult to monitor, correct and maintain asset allocation, also in a tax-efficient way. In fact, it is virtually impossible for a casual individual investor to do so. Equity and debt inherently grow at very different rates, with equity fluctuating wildly. The theoretical approach means that most of the time you will need to transfer some of the money from equities to fixed income securities or vice versa. There will be mistakes made and there will be taxes to pay. The benefit, if any, will be minimal. So what should the investor do, it’s practical and effective? For most investors, having a large portion of their money in aggressive hybrid funds will do.

These funds keep 65-80% of your money in stocks and the rest in fixed income. As the markets swing, these funds move assets and rebalance your money in a way that is tax-transparent for you. The best (check out Value Research Online) do a decent job and certainly much better than any individual investor.

Is that all there is to it? No, but that’s the minimum you can get away with, with one exception. The money you may need over the next three to five years from your savings and investments should be in the form of fixed income securities. Add up your emergency fund and this amount and keep it in something that is safe and sound. Between that and hybrid funds, that’s all the asset allocation you could ever need, and all you can put the time and effort into, but more than enough.

(The author is CEO, VALUE RESEARCH)


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