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Too 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.

Its like getting out of your home, not knowing where you want to go!

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 as Financial Planners 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 is 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.

For eg if Rita is aged 30 years and Mr Gupta is aged 50 years old, following is the likely asset allocation suggested for them

Asset Alloacations

Asset Class Rita 30yrs Mr Gupta 50yrs
Equities 30% 15%
Fixed Income 10% 20%
Property 50% 50%
Gold 5% 10%
Cash 5% 5%
Total 100% 100%

Its like when an infant learns to walk, he/she can fall many times in the duration of their learning, but they get up at once and move on!

Whereas, an elderly person, needs help to walk, and should not fall easily, due to his/her age.

Since Rita is young, she has a higher appetite for risk and needs some amount in Fixed Income to ensure her portfolio is well hedged in falling markets and property would always provide a fall back in declining markets and provide for the basic security needs.

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 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.

Following the above example, of Rita aged 30 yrs and Mr Gupta aged 50yrs, how their asset allocation changes with markets going up- say by 15%.

Asset Allocations when markets move up

 Asset Class Rita`s allocation changes when markets go up 15% Rita`s allocation to be corrected to Mr Gupta when markets go up 15%  Mr Gupta`s allocation to be corrected to
  Equities  34.50%  33.015  17.25%  16.88%
  Fixed Income  10.00%  9.570% 20.00%  19.55%
  Property  50.00%  47.847%  50.00%  48.90%
 Gold  5.00%  4.784%  10.00%  9.79%
 Cash  5.00%  4.784%  5.00%  4.88%
 Total  104.50  100.000  102.25%  100.00

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.