Just a few days ago when I stepped out for a walk in the evening, I could hear thunderstorms along with lightening which forced me to rush back home to pick up an umbrella alongside for my safety. Here in Delhi relative to other parts of India, it rains quite seldom and you enjoy and become happy just when you see dark clouds in the sky. Rain certainly adds to the fun and feeling is just awesome.

As I walked a few hundred meters away from my house, there was a huge dust storm which often preceeds a heavy downpour. Thankfully I had umbrella to my rescue with the help of which I could save myself (although partially) from the dust particles & a lot of other stuff from the road side thrown on to me by the strong winds. (Swatchh Bharat abhyan is what I thought of that very moment).

Witihin a few minutes to my delight, it started to pour and I quickly found a shade under which I placed myself with umbrella still open to save me from getting drenched completely.

While I enjoyed the rain and with my thinking cap always on, I could relate the use of an Umbrella to Asset Allocation when it comes to investments.

If assets are allocated properly (as per the risk profile/ time horizon other factors etc.) then it can surely save you from

1. Thunderstorm: various analysts/chartist/naysayers who often forecast the market movement every second/minute/hour let alone days/months & years.
2. Dust Storm: Brexit, interest rate hike/cut, demonetization (latest), Trump, GST, China fear , Europe fear, politics etc.
3. Rain: Irrational Exuberance in the markets( both on upside/downside)

Asset Allocation can be for your overall investable/incremental corpus (financial  or Real Estate broadly(not including gold as its mostly jewelry ) and within that further in Debt/Equity or Residential/Commercial). Real Estate for large population (barring HNI’s) is their home and not investment hence we could look at Debt (FD’s/Bonds/mutual funds etc) & Equity (direct/mutual funds etc) for time being.

I have often seen people chasing returns in an asset class and then skewing their portfolio completely in favor if it ( during 2006-2007 bull run in equity, 2010-2012 in real estate, and ongoing bull run 2014-till date). The impact of which is that you tend to get stuck with that asset class with majority of allocation followed by low  or even negative returns ( actual or notional) in future years. Emotion takes over your decisions and then one starts behaving irrationally and end up disposing /discarding the asset till the next time or in a few cases forever.

Asset Allocation works well with majority unless you are veteran in stock market investing and can stay invested 100% in equities all the time with all bear/bull runs & beast named –‘volatility’ (which infact can be great way to wealth creation). It’s quite natural & easy to increase your allocation to equities when the markets are making new highs everyday irrespective of what the risk/reward ratio is. One would also hear from the majority that they are in it for long term say 3 years, 5years or even 10 years as the things are quite upbeat and no other asset class is performing even close to it (current or recent past performance) ; but more often than not, this scenario reverses once the markets are down 10-15%(could be more or less) and don’t move for may be weeks/months/year(s.) Emotions rule and once again suddenly FD’s or Debt or Real Estate looks safe and good investments. BUY LOW SELL HIGH often doesn’t work although everyone on the street would know it. It’s difficult to implement it.

Asset Allocation depending on your risk profile, time horizon etc. would allocate the corpus in appropriate mix of assets classes desired of achieving an X output (return) over a period of time. It gets adjusted/re- balanced whenever market behaves irrationally only to your benefit (go up or down, bear or bull) and you are back to your original allocation. Let’s take advantage of irrational markets than being irrational investors by allocating appropriately.

Get an Umbrella for your benefit!!

Happy Investing!!!

Kunaall Milwani
Partner
SKU Consultants