The Importance Of Asset Allocation

Bhavesh Doshi
Head (Debt Market and MF Distribution),
Dalal and Broacha Stock Broking (P) Ltd.

“There are decades where nothing happens, and there are days, not weeks, where decades happen. ” — Vladimir Lenin. Everyone should remember the above quote while investing. Asset allocation is nothing but a disciplined and balanced approach towards investing. How best you can allocate your investment to different asset class depends upon your defined life goals. Hence, it is very imperative and important for any investor to write down his or her life goals and horizon before approaching a financial advisor. This is crucial since investors often suffer from bias developed from whatever the current situation may be and this can lead to mistakes in allocation.

For example, if the equity market is doing well, there is a temptation to tilt their investments towards equity. An investment portfolio must consist of the following:

It is very important to study how the above asset classes behaved during the last few crises, including the dotcom bubble burst, Enron power issue, the epidemic of severe acute respiratory syndrome, etc. Refer to the chart below:

The equity market went down by 51 per cent and then shot up to 82 per cent. During this period, gold rose by 29.55 per cent and G-Sec YTM fell by 50 per cent. Yield is inversely related to G-Sec price The following chart shows market behaviour during the crises of sub-prime, Satyam and the European debt crisis:

As can be seen from the table, the equity market went down by 58 per cent and then increased to 59 per cent. During this period, gold rose by 140 per cent and G-Sec YTM increased by 14%.

The following chart shows market behaviour during the ongoing crisis of the corona virus:

The equity market went down by 38 per cent in just two months. Looking at the above data, it is clear why asset allocation is so important and the reason why one should not put all the eggs in one basket. It is during such a difficult time that asset allocation provides you a cushion against the shocks. It is a well-known fact that no one is able to catch the bottom and top of the market, which makes timing the market a very difficult task. That is why when investing in the equity market it is very important to invest through the SIP or STP mode and design the portfolio to invest in different types of schemes i.e. large-cap, mid-cap, multi-cap, small-cap, thematic fund, etc.

While investing money in debt we have often seen investors pitching for higher YTM products, neglecting the safety aspect of the investment while trying to maximise the returns, and thereby defeating the whole purpose of allocating money to debt. Gold always insulates your portfolio during a crisis and protects your purchasing power. In the recent ongoing crisis, all the central bankers will come out with a huge fiscal package and thereby resort to quantitative easing (QE), which will increase the money supply immensely but which in turn will reduce your purchasing power since inflation will go up. Gold will emerge a winner during the coming days.

A Tip

What should you do when markets fall? Remember that it is very important to remain solvent during a crisis. Investors worry and rush to pull back their investments when the markets begin to tumble. Financial experts suggest the reverse of it. They advise that instead of taking the panic-stricken way out, investors must widen their portfolio. The panic situation and the resulting losses to the portfolio are caused due to lack of any asset allocation plan.