The Telegraph
Since 1st March, 1999
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Golden rules for asset allocation

an individual’s asset allocation strategy will depend on three major factors: age, investment goals, and risk tolerance. Age is a major determinant of asset allocation. As a young investor at 30, your model portfolio may typically include a greater proportion of high risk-return assets like equity (or equity funds). As you grow older, you would much rather ease up on your equity investments and make more room for less volatile but more stable debt securities.

All investment goals have a time horizon, which is the length of time between now and when the money being invested will be spent. This can range from buying a car next year, saving for a down payment on a house in three years’ time, or saving for retirement 25 years from now.

Those with a long-term horizon, can afford to invest more aggressively in equity (or equity funds) because short-term volatility will usually be overcome by long-term growth.

Risk tolerance is also an important indicator of asset allocation. Ask yourself if you are the kind of person who spends sleepless nights every time the stock market drops, say, 20 per cent. If so, you are undoubtedly risk-averse, and therefore your approach towards stock markets (or equity funds) should be more cautious.

As you plan your financial journey, it is imperative for you to follow a systematic investment strategy — an approach where you diversify your investments among a variety of asset classes. You need to think of your investment strategy as planning a journey. You need a destination and a plan for how to get there. In this ever-changing, ever-expanding world, there’s no shortage of investment opportunities but the best ones are hard to find and need careful monitoring.

Taking a long-term perspective in light of the long-term goals of the investor, may be, is the right thing to do, but it is not always the easy thing to do. Any changes should be considered carefully.

In these volatile market conditions, as investors, we advise you to maintain a disciplined approach, and also advise you to review your existing investment portfolios and determine whether they still match your long-term financial strategies.

As far as mutual funds are concerned, be more selective in terms of quality of the portfolio of the funds you invest in.

More importantly, allocate your assets wisely, and use effective investment planning tools such as rebalancing and triggers to help achieve your investment objectives.

Remember, investing is a function of balancing risk & return. By combining asset classes with differing return distributions and risk profiles, an optimal portfolio can be constructed that boasts better return characteristics than any asset class considered exclusively. The basis of your decision is how much risk you are willing to take and your investor life cycle phase. More risk should mean, over the longer term, higher returns.

(The author is MD and CEO, Principal Asset Management Private Ltd. The views expressed in this article are his own)

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