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Asset Allocation – What to do now?

Asset Allocation
Asset Allocation

Asset Allocation is the biggest headache for any investor. The financial planners suggest a model asset allocation. There is a famous saying that one size does not fit all. The concept of model asset allocation is vague and farce. It does not take into account all the factors that influence investment risk. A bad mix of asset allocation may destroy your wealth at a faster rate. An asset allocation mix of the investors of the same age and income level can be entirely different. In past, i have observed extreme portfolio allocations. The risk-free investors are heavily invested in traditional debt instruments. On other extremes are Gold or Real Estate heavy portfolios. An extreme of any asset class is not suitable for your portfolio. In my opinion, the basic thumb rule should be to ride with the tide. In short, an investor should take advantage of current market conditions. The maximum allocation should be to an asset class that is doing well.

To ride with a tide, it is critical to understand the current economic scenario & future trends. Secondly, it may require frequent portfolio rebalancing. Thirdly, this approach is not for lazy investors. Asset allocation based on market conditions require active portfolio management. Lastly, this approach is quite risky, and any wrong judgement can be suicidal. For example, if someone invested in equity in 2013 should have exited the market early this year. The exit signal was consistent FII outflow from equity markets. A single event of “FII pullout” wiped off all the returns of 2 years in just three months. Another example is of Gold. From last few years, gold is delivering negative returns.  An investor should not be emotional towards asset allocation. Let’s check how you can decide on asset allocation

Asset Allocation – Important Factors

1. Basic Knowledge: Before you select any asset class or financial product, it is important to gain necessary knowledge about the same. If i don’t understand how a particular asset/ product delivers returns, then i cannot take right decisions. Also, it is crucial to know the factors that influence the returns. Lastly, you cannot rely on the advice of others for the same. If you think that your financial planner or adviser is doing a selfless service, then it’s the biggest mistake. One of the frequent complaints of an investor is that he is being cheated by a financial adviser. Some people glorify themselves as Certified Planner or Registered Advisers. I came across some advisers who cannot answer basic questions. Please beware and check the credentials of such advisers. You should be careful before handing over your hard earned money. An investor is being fleeced if he/she does not have basic knowledge about the asset class or financial product.

2. Healthy Mix: An asset allocation should be a healthy mix of various asset classes. Obviously, if you own a property, then the asset allocation will be skewed towards Real Estate. Excluding Real Estate, any asset or product class should not constitute more than 20% of the portfolio. It is a risk-free approach. If you are willing to take more risk than asset allocation can be skewed up to 40% in a single class. Again the decision will depend on the strong tide for the asset class.

3. Rebalancing the Portfolio: A good asset allocation can become worse if the portfolio is not rebalanced at regular intervals. The big question is what are these regular intervals. I will discuss it in detail in my future posts. Rebalancing of portfolio ensures that your returns are healthy over a period. Another example of poor rebalancing is of gold. Investors who invested in Gold from 2005 to 2007 were sitting at double-digit returns in 2012. If they stayed invested, the returns are now in single digit at around 5%. It is very easy to say that rebalance portfolio but difficult to execute. If the investor knows the factors that influence gold price, then there were enough exit signals in 2012. An exit signal, in a particular asset class, means it’s time to rebalance the portfolio.

Asset Allocation – What is the Right Mix?

As i mentioned, i believe in riding the wave. I don’t hesitate to exit a non-performing asset class. I rebalance the portfolio based on market conditions. Few weeks back i published posts that i have completely exited equity and debt funds. I received sharp reactions from some of my readers and financial advisers. My decision was RIGHT. Currently, the market is at the low point of 2015. There was news yesterday that one of the big corporate house has exited the medium to long term debt instruments. They aggressively shifted to safe heavens. It signals possible crash of debt market due to FII exit after Fed Rate Hike. I am not saying that i know everything. It is critical to remain active and catch early signals to rebalance the portfolio. In short, there is not even a single asset class that can be labelled as SAFE HEAVEN. We are in turbulent waters. You must be wondering what is the right mix of asset allocation during volatile times. Let’s check.

The asset allocation is dynamic during volatile times and is decided by external factors. In the current scenario, it is advisable to keep cash in hand. The reason being, wait for the right opportunity to invest. My current portfolio mix is as follows

Real Estate: 40%

Equity: NIL

Debt: NIL

Arbitrage Funds: 20%

Cash in Hand: 30%

Gold: 5%

Contingency Fund: 5%

I moved my partial investments from Equity and Debt funds to Arbitrage Funds which are safe & secure. During the volatile time, Arbitrage funds deliver good returns. The 5% Gold is with my wife that NO Indian husband can AVOID :). You can only plan for 95%. Also, i am keeping a close watch on Gold Prices. I am expecting Gold Prices to tumble after Fed Rate Hike. If international gold prices collapse to $950, then it will be a good entry point for the long-term. It will be a pure investment, and you can hold up to 15% gold under ideal asset allocation. A word of caution that entry price should be RIGHT. The cost of production of gold is $950 and will be the right price to enter. I am not saying that asset allocation mentioned above is ideal or the best. A financial adviser will term it as NO POSITION. In my opinion, NO POSITION is also a POSITION during volatile markets. It is always advisable to invest when the definite trend is visible. According to experts, the market will remain volatile for next 3-4 months. Moreover, only good news can change the fortunes of the market. An investor can follow dynamic asset allocation during volatile markets. It will help to generate health returns in long run.

Copyright © Nitin Bhatia. All Rights Reserved.

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Dinesh Kodiyattu
Dinesh Kodiyattu
8 years ago

what mode of investing in Gold would you advise? Physical or ETF?

Nitin Bhatia
Nitin Bhatia
8 years ago

I prefer ETF.

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