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Asset allocation

We touched upon the different categories of investments in our previous blog and we hope that it has triggered thoughts of embarking on a strategic investment journey.
To hark back to our favorite analogy- to meet your fitness goals, your trainer would provide a plan, allocating the time you spend at the gym on different types of workouts like cardio, isometric exercises, strength training and yoga to achieve your desired results. Similarly, you would need to have an investment strategy or plan that will allocate your assets according to your financial goal, your risk tolerance and investment horizon.

We have spoken about the different asset classes in our previous blog. We believe that your investment portfolio should contain the right asset mix. This asset mix can be created by tactically allocating your investment among a broad array of asset classes, industry sectors and securities. Diversification through asset allocation will insulate your portfolio from market fluctuations.

Optimal Asset allocation portfolio

There are some popular model portfolios to explain the asset allocation process based on the investor’s level of risk tolerance.

Conservative

100% safe investments

Moderately Conservative

20 to 30% in Risk investments and balance in safe investments

Moderately Aggressive

50% safe investments and 50% risk investments

Aggressive

70% risky investments and 30% safe investments

Very Aggressive

100% risky investments

Your portfolio will need to be tailored according to your:

To help you decide how to allocate your portfolio optimally , here are a few common asset allocation strategies.

Strategic Asset allocation:

You can create a basic asset mix for a long time investment horizon and stick to the asset mix composition.

Dynamic Asset allocation

You can also modify your asset class composition in relation to changing market conditions .

Tactical Asset Allocation

If you are an active investor and keep a close watch on the performance of different assets, industry sectors and stocks, you may want to trade your portfolio actively and redesign it to include investments that show the most potential for perceived gains.

Core-satellite Asset Allocation:

You could also adopt a mixed or hybrid approach and retain a portion of your core asset classes while making posture adjustments to the remaining portion.

To summarize, the four types of allocation strategies can be represented as:

Strategy	Reaction to economic environment	Posture adjustment	Core Asset classes
Strategic Asset allocation	Agnostic	Does not change	Retain
Dynamic Asset allocation	Adapt to changing conditions	Changes	Retain
Tactical Asset allocation	Active monitoring and adaptation	Actively changes	Modify
Core-satellite asset allocation	Hybrid reaction	Only for a a portion of the portfolio	One portion retained and the rest modified

92.50% of returns are attributed to strategic asset allocation, rather than market timing or stock selection. We strongly believe that how you allocate your assets is instrumental in the amount of wealth you would eventually create for yourself.

Having achieved an optimal asset mix allocation, you would need to actively manage your portfolio -either yourself or by allocating investments to capable Investment Managers.

To conclude, asset allocation is a fundamental investing principal for minimizing risk and maximizing returns on your portfolio.

What category of investments should I look at?

We hope you read our previous blog and are all set to flex your financial muscle as we move into a fresh new financial year in April. To get the most out of your savings, you need to design your investment portfolio. Just like your diet and workout schedule depends on your target goal weight and training period, your optimal asset allocation will depend on your investment horizon and appetite for risk.

You must have heard about the risks associated with putting all your eggs in one basket. This age-old adage is extremely relevant in the context of your investment or ‘asset’ allocation as well. Asset allocation refers to budgeting your savings so that it is spread across a wide variety of ‘asset classes’- like equity, bonds and cash. This allocation will comprise of a varied mix of investments, ranging from aggressive to conservative holdings.

When you allocate your assets, you do so with an expectation that you will reach your pre-set financial goals - despite the associated risks. Each asset class has a risk associated with it and this is the risk-return analysis that you have probably heard of. Risk, in financial terms, refers to the possibility of a partial or total loss of your original investment.

Amongst all the asset classes, investment in equities has the potential to provide the highest return, but is also associated with the highest risk. On the other end of the spectrum, you will find Government bonds -with the least risk and lowest return. This is the risk/return trade-off and to insulate your portfolio from market shocks, a diversified portfolio is recommended.

Let us look at equities and try to rationalize the inherent fear of the investor with regard to equity investing. As a start, let us understand the meaning of the word ‘equity’. Simply put, it means ownership of an asset. However, there are different flavours of this term:

People who invest in equity, purchase shares of a company with the expectation that the value of the shares would rise, resulting in capital gains or dividends. The flip side is that the value of the shares could nosedive. A bit like gambling, isn’t it? That is why it is not surprising that equity has always been synonymous with risk. So, historically and rightfully, people view the suggestion to invest in equity with apprehension. We understand and acknowledge this inherent risk. However, equity is not only about the risk dimension. The scepticism about investing in equity stems from having heard about and read about investors whose investments faced considerable erosion due to the volatile equity markets.

As an equity investor, it does not follow that you will go down the same path. Would you stop lifting heavy weights in the gym because your friend sustained a ligament tear? We would not think so -we would assume that you would ask your trainer to prescribe a workout based on your BMI and physical fitness. And that is exactly what your Wealth Manager at WMU would do – coach you on equity investing, what you can expect, highlight the varying degrees of risk that are present in the different equity instruments and propose an investment plan commensurate with your risk appetite and investment goal.

Within the Indian equity market, there are different equity products with different levels of risk. There are Equity Mutual funds, Equity Portfolio Management Services (PMS) and direct stocks. Let us briefly understand each one in ascending order of the risk index.

The least amount of risk is associated with equity mutual funds since these are:

Managed by an active Fund Manager who has expert back-up of a research and analysis team.
The number of stocks in each fund can range between 40 to 80 which allows for diversification. This reduces the risk of holding only one single stock (remember – all apples in one basket?).

The next one would be the Equity PMS. This essentially, is quite similar to the Mutual Fund, except that the PMS Fund Managers hold a more concentrated portfolio of 10-25 stocks. The risk is inherently higher but has the strong backing of the Fund Manager’s conviction based on rich experience and the research team in the strategy they deploy. The SEBI’s regulatory requirement of a minimum of INR 50 Lakhs for the PMS fund also helps mitigate risk to a large extent. There are also investment advisors who advise and you buy stocks or a portfolio of stocks on your own.

The third option is investment in direct stocks. This would mean you buy individual stocks as an investor. There is no fund manager or research team, there is just you-the investor- taking a calculated risk on different companies listed on the stock market. This requires significant time and thorough knowledge of the markets and one needs acumen to understand how a particular company operates, creates value for its investors and how market responds to it.

Some questions that you probably would ask yourself before buying into a company’s stock:

Should I invest in the stocks of a large, well established company that has a reassuring, steady growth curve?

Or should I invest in a small, new company with immense growth potential? Or something in between?

As you probably observed, the risk potential goes down as companies move up the market cap ladder.

To sum up our approach towards equity, investment in diversified equity can strengthen a portfolio’s performance by adding diversification and can be an option for everyone. As long as you opt for an appropriate medium of investing in equity based on your risk profile and have a right time horizon you will definitely progress towards a healthy style of investing in equity markets. Creating wealth in equity is all about having proper investment discipline and enormous patience. Warren Buffet once said, “stock market is a machine which transfers money from impatient to patient.”

Happy investing

Is it enough to just save money?

At WMU, we have been involved very closely with our clients in helping to manage their finances. As we complete 10 years of our journey, we look forward to strengthening our existing relationships further; as well as forging new bonds and creating new associations. To mark this milestone, we will be sharing our musings and experiences in a series of blogs, which we hope you will like.

Most New Year resolutions revolve around starting a new exercise regimen to look good and stay fit. We are prepared to hire personal trainers in our endeavour to look fit and fab, but does this extend to engaging a personal financial planner to make our financial portfolio look fit and healthy? How many of us make resolutions around how to make our financial portfolio flourish? Just like it’s never too late to start your fitness journey, it’s never too late to start introspecting on financial fitness. Start asking yourself this question-“How do I manage my financial journey? And the answer to this question is relevant –whether you happen to be starting out on your financial management journey or you have already embarked on it.

You can compare managing your finances to being on a journey to a prefixed destination-you could choose any of the options that Google maps readily suggests-walk, run, drive or fly to your destination.

Whatever mode you select, there are three factors associated-the cost, the duration of the journey and the risk involved. You have to evaluate these three factors and choose the mode that works best for you. Similarly, there are several modes to plan your journey to meet your financial goals. Once you have identified your financial goals, you will need to evaluate the same three factors and decide on the journey you will choose to achieve your financial goals

Since every individual’s financial position, goals and activities are unique, there is not a ‘one size fits all’ solution. Every individual differs in their outlook and approach to money and finances. We commonly come across the following approaches:

Needless to say, the third approach is recommended –saving a portion of your earnings is recommended and this habit needs to become as natural as brushing your teeth. Cliched as it may sound, this IS the way to wealth and this is something Warren Buffett discovered very early in life and made his first investment at the age of 14.

Is it enough to just save money? What is the best way to make your savings work for you? The terms ‘saving’ and ‘investment’ have overlapping connotations- savings loosely refers to putting money aside to tide over unexpected crises or a long term goal. Investing refers to parking your money in different assets with the expectation of potential gains in your corpus funds. Saving money is a discipline and financial planning is the strategy that will make this discipline create dividends for you.

A very essential part of this discipline is to dedicate time to personal finance or financial ‘hygiene ’(we will delve into this topic in our upcoming blogs). I’m sure most of you make excuses that work pressure prevents you from allocating any time to personal finance management. The money that you make by working so hard, can itself help reduce these long hours, by working for you. The returns that you can make by a dedicated personal financial plan will soon outweigh the money that you are earning by working 16-18 hours a day and provide you with the luxury to follow your passion and leisure pursuits.

If you are unsure or hesitant about going to a Financial Planner, we urge you to explore the Personal Financial Management apps available easily and freely which can guide you and provide a perspective on the saving and investment journey.

Embark on your financial journey today. You can always do a course correction along the way to stay on track to achieve your financial goals. We hope that our blog series will help you on your journey.