{"id":10362,"date":"2018-05-01T11:00:06","date_gmt":"2018-05-01T05:30:06","guid":{"rendered":"https:\/\/www.moneyworks4me.com\/investmentshastra\/?p=10362"},"modified":"2024-05-07T10:18:35","modified_gmt":"2024-05-07T04:48:35","slug":"why-do-you-need-to-do-asset-allocation","status":"publish","type":"post","link":"https:\/\/www.moneyworks4me.com\/investmentshastra\/why-do-you-need-to-do-asset-allocation\/","title":{"rendered":"Why do\u00a0you need to do Asset Allocation?"},"content":{"rendered":"

Asset Allocation is the single most important skill of a successful investor<\/strong><\/p><\/blockquote>\n

Simply put, Asset Allocation means dividing up your Investable Surplus among different types of investments (e.g. stocks, mutual funds, liquid fund, gold, long-term debt etc.) and in specific proportions according to your goals, risk profile, and stage of life. The trick is to allocate your Investable Surplus in a way that gives maximum returns with minimum risks. Asset Allocation also assures that you diversify, protecting your portfolio from sudden changes in the market.<\/p>\n

Most of us manage investment in Equities, and the rest of our savings as two different portfolios. Some people put all their money in a Fixed Deposit or some Fixed Income Fund. So, like it or not, we all do Asset Allocation. But, we do it sub-optimally. We either leave too much on the table for others to make money from our saving, or take more risk than we should. When you look at your Investable Surplus as one portfolio, and allocate it to different Asset classes based on your needs and your risk profile, you can take better decisions.<\/p>\n

Why do we need to allocate to Equity and Debt<\/strong> Asset classes? <\/span><\/h2>\n

Two reasons,<\/p>\n

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  1. Long-term goals fall into two buckets, Security and Growth. Many items in the Security Bucket are a must, and one cannot risk them not being met, when required. However, the market can be at any level when you need money. If the market is down then and, if you have to sell equity assets at a lower price, it will seriously impact your returns. Having both Equity and Debt allows you to manage this better, than when you have 100% Equity in your portfolio.<\/li>\n
  2. Possibility of higher Draw-downs, even on paper. There is always noise in media that amplifies things, scaring the best of us. With a large portion in Equity, one runs the risk of higher Draw-downs. When that happens many of Retail Investors, can\u2019t take the loss and exit the market. Even people with aggressive risk profile, wouldn\u2019t be able to take this risk, if their total Investable Surplus is in Equity. Therefore, you need a mix of Equity and Debt. E.g. a 50-50% allocation to Equity & Debt, cushions a 20% fall in Equity by half to 10%, which may be easier to handle and stay invested.<\/li>\n<\/ol>\n

    You must do a risk profiling<\/a>, and then do Asset Allocation\u2014smartly! Watch this video<\/strong> on Asset Allocation.<\/p>\n