People make investments to gain safety and liquidity. Investments give returns which are of two forms one being “Regular Income” another being “Compounding called as Growth”. Risk-taking ability is universal, Risks should be present in investments. It can be controlled through a mechanism called “Asset Allocation”.
We invest to earn returns on our money. It’s an interesting fact that no single asset performs better than other assets. Concretely, in the last 10 years, different assets have been ahead at different points in time. We can comprehend that no single asset can always give you maximum returns consistently.
In the Year 2010 & 2011, Asset class Gold was the topmost with returns clocked around 24% & 29% respectively but in subsequent years the Gold as an asset class was displaced from top-notch, hence in a nutshell Winners Rotate.
If you follow a strategy of chasing the winners & invest in the last year’s best asset class, the CAGR returns for almost 25 years are as below.
However, if you had followed a contrarian strategy & had invested in the last year’s worst-performing asset class, the CAGR returns for almost 25 years has outperformed the above strategy.
However, the best strategy is the asset allocation strategy which has outperformed on returns, in both the strategies, as discussed above.
Asset Allocation strategy from conservative to aggressive investment spectrum is as below
The risk-adjusted return with 30% in Debt & 70% Equity is better off than 100% Equity. Hence look for an Asset Allocation strategy.
Benefits of Asset Allocation Strategy
- Provides a disciplined approach to diversification.
- Encouraging long-term investing.
- Eliminating the need to time investment decisions.
- Reducing the risk in your portfolio.
- Adjusting your portfolio’s risk over time.
Focusing on the big picture.
A small exercise of noting every smallest investment made and its purpose can help us understand the quantum of asset we hold. Every penny needs to have an end goal. Allocation of money starting from a few pennies to dollars will help to create wealth. After the creation of wealth different set of goals will emerge.
This process is cyclical which will help an individual to attain “Nirvana”. Money that will not be used for a long period should be invested in equities to participate in the economic growth of India. This will help to judge oneself by keeping track of wealth creation. This concept is known as “Asset Allocation”.
Asset Allocation in simple terms can be understood as where should we invest money and in what proportion. No single asset class can fulfill four basic requirements of investment which are – “Returns, Liquidity, Safety, and Minimal Tax”. As different food items help to keep a balanced diet similarly, Different class of asset collectively helps us to achieve four objectives of investments. Asset allocation provides the right balance to your investments. Several researchers have proved that without asset allocation, we cannot become a successful investor.