Asset allocation and its importance

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New Delhi: As children we have all come across the saying “Don’t put all your eggs in one basket”. Back then, we never understood the full essence of this idiom, but now this saying is one of the fundamentals of good investing. This means that an investor must opt ​​for an efficient asset allocation. But what is it exactly?

Asset allocation involves dividing your portfolio into a combination of different investment avenues such as stocks, debt and cash. The process of determining the ideal combination for you is subjective and based on a number of factors such as your risk appetite, investment period, return expectations, etc.
To better understand this portfolio diversification strategy, we were joined by Santosh Navlani, COO of ET Money on The Money Show.

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He explained why investing follows the “one size does not fit all” approach. He indicated that having a balanced portfolio is the way to ensure good returns, and said that while stocks and debt are good instruments to have in your portfolio, you should also invest in gold to balance and compensate for losses incurred by equity or debt investments. He further added that 25% stocks, debt and gold is a healthy asset mix.

Elaborating on types of asset allocation strategies, he named 6 methods: strategic asset allocation, constant weight asset allocation, age-based asset allocation, tactical asset allocation, asset dynamics and insured asset allocation.

Asked about his views on portfolio reallocation, Santosh said it should only be done if there were significant deviations from the initial return expectation.

An example of asset reallocation would be-

Ram wants his annual investment of Rs 2 lakh to grow at a constant rate of 11% per year. Historically, stocks have returned 15% per year and bonds 7% per year. It allocates 50% of the investment to equities and 50% to bonds to obtain an average return of 11% per year. Ram rebalances the portfolio every few years and brings it back to 50:50.

Santosh Navlani argued in favor of asset allocation and said it enforces discipline in investments and ensures that an investor will not make bad decisions out of greed or fear.

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