Salil Kothari of Cyclo Investments
Asset allocation is an investment strategy that aims to balance risks and returns by allocating the assets of a portfolio according to objectives, risk tolerance, investment horizon and opportunities. of an individual’s market.
Most financial professionals believe that asset allocation is one of the most important decisions for an investor. Numerous research reports suggest that 80-90% of the portfolio returns (wealth) realized by the investor depend on the asset allocation. This means that the selection of individual securities is secondary to how the assets are allocated.
A broad asset allocation includes real estate, stocks, fixed income instruments and gold. Financial instruments Asset allocations are domestic equities, international equities and fixed income securities. (You can micro-allocate assets with an individual asset class. For example, within equity assets, select large-medium-small caps, by sector, etc.)
Importance of asset allocation
The goal of asset allocation is to reduce risk through diversification by combining a variety of investments that have performed differently during various market conditions. A multi-asset approach significantly reduces the risk in terms of annualized volatility and drawdown and further smoothes the path of returns. In doing so, one can create a balanced portfolio that helps to stay on track and achieve goals.
Different types of asset allocation
There are several types of strategies for determining asset allocations, given their basic management approaches.
- Strategic asset allocation – Strategic allocation is a long-term asset allocation, consistent with the risk profile and financial objectives of the investor. This method establishes and tracks a comparative mix of assets based on the expected rates of return for each asset class in order to reduce risk and improve returns.
- Tactical Asset Allocation – Tactical asset allocation sometimes involves short-term tactical deviations from the mix in order to take advantage of unusual or exceptional investment opportunities. This flexibility includes a market synchronization factor in the portfolio, in order to generate higher portfolio returns.
- Constant Weight Asset Allocation – This approach involves regularly rebalancing your portfolio. For example, if an asset is losing value, we would buy more of that asset. And if the value of that asset increased, we would sell it.
- Dynamic asset allocation based on trends – This strategy is opposed to a constant weight strategy. For example, if the stock market shows a decline, one sells stocks in anticipation of a further decline and if the market is strong, one buys stocks in anticipation of continued market returns.
- Allocation of insured assets – With an insured asset allocation strategy, a base value of the portfolio is established below which the portfolio should not be allowed to fall. As long as the portfolio achieves a return above its base, active management is exercised with the aim of increasing the value of the portfolio as much as possible.
You can combine two or more strategies, for example the strategic allocation suggests 50% equity and 50% debt, but within equity, tactical allocation can change equity by 30-70% depending on the opportunity.
One of the most important elements of monitoring the strategy is to rebalance it periodically. The asset allocation can also be changed not only by buying and selling the primary, but can also be rebalanced by adding new capital to an asset to rebalance the allocation.
How to build a solid risk / return balanced portfolio through asset allocation?
- Take an inventory of your current assets: With constantly changing markets, it’s easy to lose sight of where your current assets are invested. Determine Your Financial Goals: Determine your short and long term goals.
- Identify your risk profile: Identify your risk appetite. Are you risk averse or are you willing to take on more risk with the potential for better returns?
- Do your research: Now it’s time to decide where you want to allocate your assets.
- With variety of mutual funds, bonds, equities and alternative holdings, it may be worthwhile to choose the investments that match your specific needs, especially in a volatile market. Allocation approaches that require reacting to market volatility need expertise and talent to use specific tools to calculate these movements.
- Finance professionals are skilled at understanding the changing marketplace and can help you create a balanced and diversified portfolio suited to your financial situation.
Opinions are personal: the author is Salil Kothari of Cyclo Investments
Disclaimer: Opinions expressed are those of the author and are personal. TAML may or may not subscribe to the same. The opinions expressed in this article / video are in no way intended to predict or time the markets. The opinions expressed are for informational purposes only and do not constitute investment, legal or tax advice. Any action taken by you based on the information contained in this document is your sole responsibility and Tata Asset Management will not be responsible for the consequences of any such action taken by you.
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