Diversification: An Art or Science?

Basic premise of Asset Allocation

A fundamental case for asset allocation is that different asset classes offer returns that aren't perfectly correlated hence diversification reduces the overall risk in terms of the variability of returns. Statistics show that more than 90% of the returns of the portfolio depends on the asset allocation, while individual selection of securities only plays a miniscule role. Prepare a financial plan; and invest prudently by aligning your surpluses with your risk/return profile, key financial goals and complementary asset allocation options.

Approach to Asset Allocation

The asset allocation largely depends on the two factors, Risk Tolerance and Time Horizon. The key to a successful approach to diversification is to research investment avenues and add only the ones that are negatively correlated. It is also important to re-balance assets on a time-to-time basis to ensure that the portfolio is adequately diversified.

Identifying Asset Cycles

Asset allocation is not a just a one-time effort; apart from aligning it to one’s financial goals, risk appetite, age etc., there is another parameter - being in the right place at the right time. Here’s a quick look at how various asset classes have fared and how certain asset classes have done better than the others at various points in time.
Asset Allocation is pertinent to optimize your returns and stay well within the preferred risk profile. Regular monitoring will help manage risk in alignment with financial goals and create wealth in the medium-long term. Diversification is an effective way of making your money work hard for you!
Asset allocation protects the range from significant losses. Historically, Gold, equity and debt has moved in different path. The relationship between equity and debt is negative, if equity market does badly. The debt market can help out to manage the losses. Gold also has inverse relationship with equity market.

Tips for Asset Allocation

• Start your asset allocation with tax planning and remember not to put all your eggs into one basket
• Align your investments such that they are well-balanced and negatively correlated
• Plan your investments across – Short, Medium and Long term
• If markets have run up sharply, be cautious, even if you can afford to take risk
• Use derisked investment styles like Systematic Investments