The only asset allocation strategy every investor needs to know

Easy and practical guide on asset allocation. ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ [Value Research Editor's Note]( 20th April, 2024 --------------------------------------------------------------- Dear {NAME}, Every Saturday, I share my perspectives on a topic investors need to understand. If you know anyone that would enjoy this note, please forward them this email. They can sign up for free [here](. This week, let’s discuss something that everyone should do but a lot of people don’t: asset allocation. Here’s a simple, easy and practical guide. Real, practical asset allocation Asset allocation is vital but hard to do for individuals. Here’s a simple, easy, yet effective substitute Since February 2020, so much has changed in the world that one would automatically assume that everything would have changed for investors as well. Now, just as the Chinese virus is winding down, we have this war in Europe. While the war itself could have been a little regional affair like so many that go unnoticed, the US and its camp followers have made a determined effort to globalise its impact. We have raging global inflation, currency upheavals, falling equity markets, central banks jacking up rates, the western sanctions, China’s continuing covid travails, slackening demand and an unpredictable recession in the western countries. Surely, everyone’s investing strategy must change? Well, yes and no. To understand why, look at the various phases of the virus reaction. In February 2020, a great big crash came when it looked like the sky was falling. A lot of people sold and rushed out of equities. After that, it’s been a roller coaster of different sectors and companies of different sizes, with investors frantically hunting for clues to locate some map of the near future vis-a-vis the near and far-term impact of the virus. Even in the phases when stock prices are rising, investors have been shaky in their beliefs and made more decisions based on short-term guesswork and fear. As the virus has receded, wars and sanctions have started. One side effect has been that investors’ asset allocations have gone seriously out of whack. There are investors who have rushed in and out of equity and then rushed back in a great hurry. On top of that, there have been these distractions of the IPOs. First came the ‘digital IPOs’ and then LIC. On top of that, inflation is now running higher than the returns from almost all fixed-income assets, creating different problems. The conventional response to this--something that I have advocated in the past--would be that investors should work on fixing their asset allocations. That’s an almost automatic reaction to anyone who analyses investments. Is asset allocation wrong? Equity and fixed income proportions different from what they should be? Fix it. Simple. But not really. The reason is that almost no one can really do it as an individual. This real-world observation may be contrary to the general advice, but this is what actually happens. It’s awfully hard to actually monitor, correct and maintain asset allocation in a tax-efficient manner. In fact, it’s pretty much impossible for a casual individual investor to do so. Equity and debt inherently grow at very different rates, with equity swinging wildly. The theoretical approach means that you’ll most likely have to switch some money from equity assets to fixed income or back. There will be mistakes made, and there will be taxes to be paid. The benefit, if any, will be minimal. So what should the investor do that is practical and effective? For most investors, having a large chunk of their money in Aggressive Hybrid funds will do the job. These funds keep 65 to 80 per cent of your money in equity and the rest in fixed income. As the markets swing around, these funds shift assets and rebalance your money in a manner that’s tax-transparent for you. The better ones (look up Value Research Online) do a decent job at it and certainly far better than any individual investor would. Is that all that there is to it? No, but this is the minimum you can get away with, with one exception. Money that might be needed over the next three to five years from your savings and investments must be in fixed income. Add up your emergency fund and this amount and keep it in something that’s safe and sound. Between this and the hybrid funds, this is all the asset allocation you might need, and all you can take out is the time and the effort, but it’s quite enough. Thank you for being a Value Research Insider. I hope you found this note useful and interesting. What did you think of today’s note? [Click here to let me know](mailto:dhirendra@valueresearch.in). [vro-logo]( Copyright © Value Research India Private Limited 2024. All rights reserved. C-103, Sector 65 Noida, 201301. [Manage Newsletters]( [Unsubscribe]( [Privacy Policy]( Follow us [twitter-icon]( [facebook-icon]( [youtube-icon]( [linkedIn-icon]( [instagram-icon](