ASSET ALLOCATION

The right asset, time and mix approach

- BY THABRESH I., DEEPAK SINGHAL, JEYAPRAKASH M.

ASSET ALLOCATION is the cornerstone of wealth creation and capital preservation. With market cycles constantly shifting, the ability to allocate assets optimally can significantly impact long-term investment returns.

ALLOCATION OVER TIMING

Investors often chase returns, trying to predict market movements. However, a renowned study on portfolio performance attribution reveals that 91.5 per cent of long-term portfolio returns come from asset allocation, not market timing or stock selection. This means that choosing how much to allocate to equity, debt, gold/silver, or REITs/In-VITs matters far more than trying to pick individual winners.

Historical data supports this. In 2008, during the Lehman crisis, equities dropped by 51 per cent, while government securities (g-secs) delivered a 28 per cent return. Conversely, in 2009, as markets recovered, equities soared by 78 per cent while g-secs delivered -9 per cent.

THE RIGHT ASSET

Market cycles determine which asset class performs best at any given time. For instance, equity broadly thrives in expansionary phases, debt performs well in contractionary economies and gold acts as a hedge against uncertainty.