Saturday Brain Storming Thought (202) 23/12/2023
ASSET ALLOCATION
Asset Allocation is the implementation of an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to the investors risk tolerance, goals and investment time frame
Key Takeaways of Asset Allocation
1) Asset Allocation is how investors split up their portfolios among different kinds of assets
2) The three main asset classes are equities, fixed income, cash and cash equivalents
3) Each asset class has different risks and return potential, so each will behave differently over time
4) No simple formula can find the right asset allocation for every individual investor
Asset Allocation strategy
1) Strategic asset allocation
You determine your equity and debt exposure and then stay fixed on the ratios
2) Tactical asset allocation
Alter the allocation to cash in on favorable markets
3) Dynamic asset allocation
You don’t have a fixed allocation ratio but invest your money as per market investment
One of the most common tactical asset allocation strategies is momentum based strategy
Momentum can cause stock prices to rise rapidly in a short period of time boosting your short term returns
4 rule of asset allocation
You add up all of your investments and withdraw 4% of that total during your first year of retirement
In subsequent years you adjust the amount you withdraw to account for inflation
Proper asset allocation by age
You should hold a percentage of stocks that is equal to 100 minus your age
Passive asset allocation strategy
A passive asset management approach allocates a portfolio similar to a market index and applies a similar weighting as that index
Passive asset management aims to generate similar returns as the chosen index
Time horizon in asset allocation
Your time horizon is the number of months you need to invest to achieve your financial goal
Longer time horizon prefer risk investment and shorter time horizon prefer less risk investment
Risk tolerance in asset allocation
Risk tolerance is your ability and willingness to lose some or all of your original investment in exchange for potentially greater returns
Diversification in asset allocation
The practice of spreading money among different investments to reduce risk is known as diversification ie don’t put all your eggs in one basket
Rebalancing in asset allocation
Rebalancing is what investors do to bring their portfolio back to it’s original asset allocation mix
Ways of rebalancing
1) sell investments where your holdings are over weighted and buy investments for under weighted asset categories
2) buy new investments for under weighted asset categories
3) alter your contributions so that more goes to under weighted asset categories until your portfolio is back into balance
Alternative assets
1) commodities – precious metals, non-ferrous metals, agriculture, energy and others
2) Commercial or residential real estate
3) Collectibles such as art, coins or stamps
4) insurance products
5) collateralized debt
6) foreign currency
7) venture capital
8) private equity
9) Distressed securities
10) infrastructure
11) hedge funds
Benefits of asset allocation
1) reduced risk
2) more consistent returns
3) a greater focus on long-term goals
Factors affecting asset allocation
1) age
2) income
3) time horizon
4) risk tolerance
Importance of asset allocation
1) invest early
2) have higher future growth in income, it increases your risk taking ability
3) keep a track of your expenses
4) diversify your assets
5) avoid excessive loans
6) longer your time horizon, greater will be your risk raking capability
Life cycle investment goals
1) Near term – high priority goals
2) Long term – high priority goals
3) Lower – priority goals
COMPILED BY:-
Er. Avinash Kulkarni
9822011051
Chartered Engineer, Govt Regd Valuer, IBBI Regd Valuer
