A simple, easy, effective way to go about asset allocation


Since February 2020, so much has changed in the world that one would automatically assume that everything would have changed for investors as well. Now, just as the covid virus is winding down, we have this war in Europe. While the war itself could have been a little regional affair like so many that go unnoticed, the US and its camp followers have made a determined effort to globalise its impact.

We have raging global inflation, currency upheavals, falling equity markets, central banks jacking up rates, the western sanctions, China’s continuing covid travails, slackening demand and an unpredictable recession in the western countries. Surely, everyone’s investing strategy must change? Well, yes and no.

To understand why, look at the various phases of the virus reaction. Starting in February 2020, first came a great big crash when it looked like the sky was falling. A lot of people sold and rushed out of equities. After that it’s been a roller coaster of different sectors and sizes of companies, with investors frantically hunting for clues to locate some kind of a map of the near future vis-a-vis the near and far term impact of the virus. Even in the phases when stock prices are rising, investors have been shaky in their beliefs and have made more of their decisions based on short-term guesswork and fear. As the virus receded, wars and sanctions started.

One side effect has been that investors’ asset allocations have gone seriously out of whack. There are investors who have rushed in and out of equity and then rushed back in a great hurry. On top of that, there have been these distractions of the IPOs. First came the ‘digital IPOs’ and then . On top of that, inflation is now running higher than the returns from almost all fixed income assets, which creates a different set of problems. The conventional response to this—something that I have advocated in the past—would be that investors should work on fixing their asset allocations. That’s an almost automatic reaction to anyone who analyses investments. Asset allocation wrong? Equity and fixed income proportions different from what they should be? Fix it. Simple. But not really.

The reason is that almost no one can really do it as an individual. This is a real world observation that may be contrary to the general advice but this is what actually happens. It’s awfully hard to actually monitor, correct and maintain asset allocation, that too in a tax-efficient manner. In fact, it’s pretty much impossible for a casual individual investor to do so. Equity and debt inherently grow at very different rates, with equity swinging wildly. The theoretical approach means that most of the time, you’ll have to switch some money from equity assets to fixed income or back. There will be mistakes made, and there will be taxes to be paid. The benefit, if any, will be minimal. So what should the investor do, that is practical and effective? For most investors, having a large chunk of their money in Aggressive Hybrid funds will do the job.

These funds keep 65 to 80% of your money in equity and the rest in fixed income. As the markets swing around, these funds shift assets and rebalance your money in a manner that’s tax-transparent for you. The better ones (look up Value Research Online) do a decent job at it and certainly far better than any individual investor would.

Is that all that there is to it? No, but this is the minimum you can get away with, with one exception. Money that might be needed over the next three to five years from your savings and investments must be in fixed income. Add up your emergency fund and this amount and keep it in something that’s safe and sound. Between this and the hybrid funds, this is all the asset allocation you might need, and all you can take out the time and the effort for—but it’s quite enough.

(The Author is CEO, VALUE RESEARCH)



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