There is No Fate But What We Make: Importance of Asset allocation

Saturday, January 03, 2009

Importance of Asset allocation

Investing according to an Asset allocation plan and sticking to your plan is so hard when you are bombarded by noise from newspapers, loud TV channels, tips and "research" articles from brokerage houses, tips from friends and colleagues and of course, blogs such as this. So I thought I'll share some my asset allocation information.

This is at the beginning of 2008.














This is at the beginning of 2009.













The changes were mainly due to the 50% downward market movement. Also, it was a conscious decision to increase the commodity part to 4%. The real estate part increased not due to an appreciation of market value but due to outstanding principal going down as I paid off EMIs. I created a 4.5 Lakh emergency fund and that contributed to an increase of debt percentage. A good chunk of incremental investment goes into debt, whether I like or not (PF, Employee Superannuation, LIC policies).

The general market is down more than 50% and yet my networth has held almost steady. This cannot be explained by the incremental investment in the year 2008 as it represents only 10% of networth. It can be explained by simple principles of asset allocation and diversification.

Based on my risk profile and financial goals, I had decided to have 45-25-25-5 split among equity, debt, real estate, commodity. I would like a higher equity % and a lower real estate %. However, I have to take into consideration the large ticket sizes of real estate investments (in the absence of real estate mutual funds for retail investors in India) and the compulsory debt investments such as PF and Superannuation.

As my current asset allocation is far from my target, this is what I will working at. Increase the equity portion and decrease the debt portion. I won't be able to control the real estate part so much due to the large ticket size. So the future incremental investments will be skewed towards equity. Not that I haven't done so in 2008. But due the need of building an emergency fund and market conditions, the equity % went down.

The point is - we tend to take more logical decisions when they are based on our personal financial profile & asset allocation rather than the noise around us.

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