Smart investing: why you should stick to asset allocation

Pursuing a particular target price is only worthwhile if you have expertise in that asset and have a finger on the dynamics of the market.

By Joydeep Sen

Some bases don’t change, even with changing times. The basis or rationale for allocating your portfolio is one of them. Along with the changing times, the dynamics of the market change, new investment opportunities appear, and you can also develop new perspectives. However, the importance of asset allocation remains as important as ever. Why?

  • The markets are uncertain, no one knows for sure how much stocks or gold will yield over the next year.
  • However, from the historical behavioral model of this investment asset, there is a broad perspective on the expected returns over an adequate investment horizon and the level of risk to achieve this objective.

The essence of portfolio allocation is twofold: (a) matching the risk profile of the investment asset with your risk profile and (b) diversification into various assets decreases the risk of your portfolio in a to some extent.

Current market level
What you have just read is not a new discovery. So why reiterate? The reason is, at present, that a part of investors is trying to assess the current level of the market, with the implications of a portfolio allocation in accordance with this judgment. Common choruses are like this:

  • Equity markets have beaten fundamentals, valuation levels are not cheap, so equity allocation should be lower;
  • In debt / fixed income, interest rates are low and levels of adjustment are not attractive, real returns net of inflation are negative, so why invest in debt?
  • Gold prices have come down, unless there are indications of rising gold prices, there is no reason to invest in gold.

These arguments may be correct, but they are irrelevant. This is not the basis for deciding the allocation of your portfolio anyway. Note, you have no control over market levels or returns. What you have control over is your wallet. What you do should be rational and in your own best interests, and not motivated by emotions, hearsay, or non-expert opinions.

Portfolio allocation
The rational approach is that the past behavior of stocks, debt or gold or other investment assets broadly tells us how much can be expected over an adequate holding period; given the risks of this asset class, the amount of allocation that would be right for you and the extent of the negative correlation between these assets, which helps you reduce your portfolio risk.

Let’s look at another point of view. Is there any risk in ignoring current market levels? Not a lot. When you invest at a certain market level, say stocks at a certain valuation with a current P / E being on the higher side of the historical average or fixed income at a certain interest rate level (currently it is on the lower side according to the story), it influences your returns for a while, say next year for the sake of discussion. However, over the long term, the market dynamics of this asset gain the upper hand. Therefore, as long as you have a long enough horizon, you can afford to ignore the entry-level situation. Moreover, if you enter the market at a favorable time, for example, stocks at a cheap valuation or fixed income securities at a high interest rate, an adverse event may occur in the short term and affect your profits. yields. In the long term, the markets tend to stabilize and regain their level.

To do something, there is an innate reason and there is an apparent reason. You need to declutter your thoughts and see what drives your investment decisions. Pursuing a particular target price is only worthwhile if you have expertise in that asset and have a finger on the dynamics of the market. Otherwise, follow the portfolio approach with appropriate diversification, depending on your investment objectives.

The writer is a business trainer and has written books on wealth management

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