Asset Allocation

Asset allocation is the best tool for financial planning. It is the essential part of any portfolio. But still many people don’t understand the meaning of Asset Allocation.

What is Asset Allocation?

Well, In Layman’s language, Asset Allocation means spreading your money between different Asset classes such as Stocks, Bonds, Gold, Real Estate, Art, Businesses, Antiques…etc…

Commonly Asset allocation is done between the two asset classes which have negative correlation. The Best Example is Equity & Debt. If Equity market goes down, Bond market will go up and vice versa. So it is advisable to have Equity & Debt both in tour portfolio.

Advantages of Asset Allocation -

The main advantage of Asset allocation is that, different asset classes perform differently in the different market conditions. Say for Example if Equity is down, Gold will be up and if Equity will be up, the gold will be down. So Asset allocation will provide over all stability to your portfolio in the different economic cycles.

Asset allocation will help you to protect your portfolio in various economic cycles.

Ideal Asset Allocation -

The main question is, What should be the ideal Asset allocation? Many financial planners have written tons of material on this. But as a general Rule of Thumb, 120 – Your Age should be Equity Allocation & rest in Bond or any other Allocation.

Say for Example if your age is 20 years today and you want to invest money than your portfolio should be of 100% Equity only and nothing else. But if you are 30 than 90% should be in equity and rest in Bonds, Gold or any other Asset.

But again, so many factors affect asset allocation. So your asset allocation should be according to your risk appetite and the time horizon to reach your goal. Say for example if you want to build a Child Education fund for your son in next 10 years than the above rule does not apply to you. In this case, Initial 5 years you should invest absolutely in equity and later on gradually shifting profit to Debt instruments and in later years absolutely debt vehicles.

So keep Asset Allocation in mind before building your portfolio.