Asset Allocation Investment

We all know the fact that one should not put all the eggs into one basket, and we also know the reason for it. This quote is perfectly applicable for Investment. If you put all your investment in one asset class, you may have to suffer heavy loss if the asset class does not perform well. If we take an example, investors who only invested in equity share market in 2008 suffered huge losses because of recession. But at the same time, the customer, who had mix of all asset class like gold, debt, equity etc. suffered less.

Asset Allocation involves dividing an investment portfolio among different asset categories, such as stocks, bonds, Real Estate, Gold, and cash. The process of determining which mix of assets to hold in your portfolio is going to be the game changer. The Mix of Asset varies from person to person.

Two most important Factors for Asset Allocation mix

The asset allocation largely depends on the two factors, Risk Tolerance and Time Horizon.

Risk tolerance is your ability and willingness to lose some or all of your investment for greater potential returns. Based on the risk tolerance, one should decide the asset class and asset allocation. E.g. a 26 year old person with no dependant can allocate more to equity or Equity linked mutual funds. But at the same time a 35 year old person with dependent needs to take care of liquidity and uncertainty. He should also consider insurance as a crucial asset class, and asset allocation should also have some exposure into debt.

Time horizon is the expected number of months or years you will be investing to achieve particular financial goal. Time horizon should also be looked at when we do asset allocation exercise. E.g. A person, whose needs are coming up in next couple of years, need to allocate some part of the portfolio into debt, if we look at the situation where the need was coming in October 2008, and person had huge exposure into equity share and was confident that he will pull out money from equity shares for the need . He may not be able to achieve his goal. At the same time, if he would have kept the money into debt. We could achieve his goals.

Why Asset Allocation is so Important

Asset allocation protects the portfolio from significant losses. Historically, Gold, equity and debt has moved in different direction. The correlation between equity and debt is negative, if equity market does badly. The debt market can help out to manage the losses. Gold also has inverse relationship with equity market.

Market conditions that cause one asset class to do well often cause another asset class to have low or average returns. If one asset class investment returns falls, person will be in a position to set off the losses in that asset class with better investment returns in another asset class. By investing in more than one asset class, one can reduce the risk of losing money and portfolios overall investment returns can have above average returns.

To conclude, many investors know the benefits of asset allocation as a way to diversify their investments among asset class. Still they do not follow the path and suffer losses when the asset class ruins their investment portfolio. so its very important to know about the asset allocation at first step and follow it .

We at Right Horizons tack the portfolios of clients and manage the risk by active asset allocation strategy which is one of the most crucial parts of any individual. We ensure that client win in both situations, when the market slumps and when it peaks by proper asset allocation.