Dilzer Consultants - Investments and Financial Planning

An ISO 9001 (2008) Certified Company

   SEBI REGISTERED INVESTMENT ADVISOR

Asset Allocation

100 percent planningToo often financial planning is made out to be simpler than it is. Of course, at a level financial planning is relatively uncomplicated. But that does not mean that it’s only about identifying investment objectives and outlining an investment plan that will help you get there. It does involve both these elements of course, but there is an equally important element that is often ignored – Asset Allocation.
As the word suggests, it means distributing your money across various investment avenues or assets so that the poor performance of any one investment does not jeopardise the entire investment plan. As logical as that sounds, it is one of the rarest traits in a financial plan.

 

  • Which asset must you own- most investors would qualify to own all the key assets viz. equities, debt, real estate, gold and cash.
  • How much of each asset should you own – is a little tricky, because it will vary from investor to investor. This is where our job comes into play to suggest the optimum allocation of “how much”

One must include a variety of assets in one’s portfolio, since each asset has its own cycle of ups and downs and therefore, the upside of one cycle compensates for the downside of the other cycle and its corresponding asset class.

For eg, if equities are on the upside, gold and real estate normally are lower on the performance radar and vice versa. This is dependent on a variety of reasons of business cycles, inflation, interest rates, oil prices and political situation- some factors within our control and some outside our control.

An illustration below best explains the asset allocation for a  young lady with relatively fewer obligations and an older gentleman who is married with kids.

Rita is aged 30yrs and Mr Gupta is aged 50yrs old.

 

Asset Class Rita 30yrs Mr Gupta 50yrs
Equities 60% 30%
Fixed Income 20% 45%
Property 10% 15%
Gold 5% 5%
Cash 5% 5%

Gold and cash become important to counter inflation and provide liquidity at times of emergencies.

The above asset allocation is only indicative and can vary with personal circumstances, needs, liquidity requirements and goals.

Other forms of asset allocation also include investing in metals, commodities, art, and foreign markets like Brazil China, Russia and Korea, that are resource rich economies.

Readjusting and rebalancing asset allocation:

When for instance, the markets go up, the equity portion of his portfolio moves up and needs to be brought down and realigned to suit his original asset percentage choice. Since, the client’s risk appetite remains the same.

What actually happens in realty- unfortunately, is following the herd mentality. If equities are booming, invest in it, even if valuations are high and that is the time to book profits, if real estate is booming, invest in it, even if it were to lock up all your money.

What one fails to understand, is, that no one particular asset class can sustain the Bull Run for long and diversification is the essential ingredient to successful investing.

And of course realigning your original asset choice when there is a change in the underlying asset performance.

Recommended Asset Allocation Table

Recommended Asset Allocation 30 yr old 40 yr old 50 yr old 60 yr old
Equity 60% 40% 30% 0
Debt 20% 20% 25% 60%
Commodities/ ETF 5% 5% 5% 0
Property 10% 30% 30% 5%
Cash/ Liquid 5% 5% 10% 35%
Percentage Total 100% 100% 100% 100%

Want us to plan your “Desired” asset allocation after evaluating your “Current” Asset Allocation?