Friday, 21 June 2013

Asset Allocation Decoded

Travelling to picturesque New Zealand or Switzerland on vacation? You won’t start your journey on a bicycle from here, right? You will take the correct mode of transportation. In this case, a flight!!

Similarly, we need to invest in the correct financial instrument to get returns in a time-bound manner so that we can fulfil our life’s goals in a planned manner.

 In short, the financial instruments we invest in should match our financial objectives. In our post on Becoming Rich - Its Possible!!, we had discussed about the different objectives which need to be catered for during one’s life. How we do it? We try to explain here...

Goal Based Portfolio :

We invest to fulfil some goals/aspirations in our life. We need to examine which investment option best suits the goals that we want to achieve. This also means, we need to plan our goals properly so that we know what we want and when, and accordingly choose the investments.

For example, 20yrs from now if you are planning to finance for your child’s higher education or marriage, you need to know which investment will give you enough return to get to that objective.

Age Based Portfolio :

Make Hay While The Sun Shines... is an old adage. When you have age on your side, better make use of it. Applying it to investments, we can say that the asset allocation and diversification should depend on your age. The more risky investments should be taken when you are young, and as the age progresses, the investments should gradually shift over to safer options. As there always is an inverse correlation between risk and returns, this will mean, as age progresses, we will move towards investments which give safer returns.

Taking the same example as above, in the same 20yrs period we must now gradually move towards conservative investment options in the same time period.

In the end our asset allocation will be affected by considerations of age and our goals and we have to strike the right balance between the two at our comfort levels. There is always some compromise and to be aware of it will give us a more realistic perspective about our investment options.

People call investing an art, science or simply math. We say, investment also should be looked upon as a philosophy. Hence this post to set the correct philosophical tone (financially) so that what we present in the future posts can be understood correctly.