Debt As an Asset Allocation

Asset allocation is the key to successful Portfolio Building. Equity & Debt both are the essential components of any portfolio. A Portfolio without having any Debt allocation is not a Portfolio. Many people consider themselves as a high risk investors and invest in Equity only but well, only Equity Investing is not the Portfolio Building.

There are several reason for having a Debt in anyone’s portfolio. One commonest reason is, Because it provides stability to your portfolio in the down market. As Equity and Debt has the negative correlation, when the Interest rates of Debt will go high, the debt will outperform but the businesses and thus the equity will suffer and when the interest rates of debt will go down, the debt will suffer but the equity will be outperformed because the capital will be available to businesses at low interest rates.

Thus, Debt is an Essential component of anyone’s portfolio.

Now, the question is that, How much Debt Allocation should be there in one’s Portfolio? Well, there is a Rule of Asset Allocation.

Asset Allocation = 100 – Your Age = Equity Allocation of your Portfolio and rest should be Debt allocation

Say for Example, if your age is 30 years than in your portfolio, The Equity allocation should be 70% (100-30) and the Debt allocation should be rest of the 30%. There are few exceptions when you can have only 0% Debt allocation in your portfolio.

The Best Example is, You are just 20-25 years of age and started investing. In this case, your portfolio should have 100% allocation in Equity only and No Debt. Because at this much early age, you don’t have any dependants on you and that’s why you can take more risk by allocating 100% money in Equity…!!!