Beat volatile market forces by proper asset allocation

Everyone starts investing with a certain goal in mind but what people rarely consider, is that determining your investment mix is as important as finalising your goal. It is important to understand that every investment has different strengths that allows to play a specific role in your overall strategy.

Because you have multiple goals, you need a combination of investments to help you achieve short-term and long-term objectives. That's the purpose of an intentional asset allocation strategy. Identifying and finalising on an asset allocation becomes particularly crucial when dealing with volatile forces in the market. Therefore, you need an asset allocation strategy that seeks a balance between risk and reward by adjusting the percentage of each asset in an investment portfolio based on the investor's risk-taking capacity, goals and the time frame needed to reach those goals. Hence, your money is divided amongst asset categories that do not all respond to the same market forces, in the same way, at the same time.

Below are few tips to ensure proper asset allocation to counter market turmoil:

Identify an asset allocation strategy

Before starting to invest in financial products, decide the asset allocation. Either do it yourself or take help from a financial planner, who can suggest an asset allocation based on the assessment of your profile. The overall allocation can vary from one investor to another. For example, an aggressive investor can have 75% in equity mutual funds, 20% in fixed income funds and 5% in gold.

There is no standard formula to ascertain one's asset allocation. Asset allocation is the function of one's age, financial standing, financial goal, risk appetite, investment horizon and expected return; the thumb rule however is: 100 minus one's age should be invested in equity. For example, if a person is 30 years old, then 70% of his savings should be invested into equity markets.

Diversify your investments

Financial markets are full of surprises and it is difficult to predict which asset class will go up or down. Thereby, it becomes important that you build a portfolio with a basket of instruments, which enables it to play a specific role in your overall strategy. For instance, some investments may provide regular income while others may serve as a temporary place to hold for cash. Some even have multiple purposes and can fill more than one role. Stick to the age-old rule in finance: "Never put all the eggs in one basket".

Keep your emotions at bay

While managing your asset allocation, it is important not to get emotional with your investments. The structuring of your investments based on logical thinking, which often gets derailed due to emotional biases of the investor. Generally, if a particular investment in your portfolio isn't performing well then it makes sense to remove it. Yet when it comes to practice, investors do quite the opposite – people continue to drag certain investments in their portfolio; as booking losses would mean accepting mistakes. Hence, if you are making an investment for an emotional purpose, right now would be a good time to pull your reigns.

Review your portfolio

Determining your portfolio's ideal asset allocation is not a set-it-and-forget-it process. It's important to regularly make sure your asset allocation reflects your current financial situation, time horizon and risk tolerance. The choices you made even one year ago might no longer be furthering your goals.

Asset allocation rebalancing takes care of booking profits when markets are high and buying when they are low. Hence, by committing to it, you ensure that your portfolio continues to benefit from booking investments when profits are on a rise.

PORTFOLIO REVIEW

• Asset allocation should reflect current financial situation, time horizon, risk tolerance
   
• If an investment isn’t performing well, then remove it

The writer is head, personal wealth advisory, Edelweiss