The right asset allocation can go a long way in helping investors fulfil their financial goals. Asset allocation is the percentage of investment or breakup of investments made in different asset classes such as equities, debt, commodities etc.
The right asset allocation depends on the various factors and there are a few strategies that can help you to build the right portfolio.
As the name suggests, this strategy helps you allocate your resources based on your age. This approach suggests that you make investments based on your age. The younger you are, your asset allocation can have higher equity exposure and vice versa. E.g, Rajesh is 35 years old and wants to invest in varied financial tools. According to the age-based allocation, it is suggested that Rajesh invests 65% (100-35) in equities, which can get him potentially high returns and invest the rest in debt fund and cash. We get 65% when we subtract 35 (Rajesh’s age) from 100, which is the base value.
Thus, the younger the investor, the higher should be the proportion of equity investments.
Strategic asset allocation is a portfolio-building strategy that involves setting target allocations (say 80% equity investments and 20% debt investments) for various asset classes and rebalancing regularly. The portfolio is rebalanced to the originally determined asset allocations when there are significant deviations from the initial allocation. The deviation can take place due to the over-performance of one asset class over another. E.g. with the rise in the equity markets, the overall allocation in the portfolio have increased from 80% to 85%. In this case, you can redeem your equity investments or increase your allocation of other assets such as debt instruments.
This strategic approach allows you to assess your risk tolerance before investing in high return services. Along with its buy and hold strategy, it also allows you to diversify your portfolio to best avoid risks and to develop better returns.
As a strategic asset allocation strategy may help in the portfolio allocation in the long run, tactical strategy may help in capitalising on short term allocation opportunities. This strategy gives the flexibility to invest in different asset classes and take advantage of the prevailing market conditions.
Tactical strategy calls for a higher level of alertness as short term opportunities may cease.
The Insured Asset Allocation approach is a strategy that is suggested for risk-averse investors.
This strategy states that you set a base rate (a certain percentage) for returns under which your portfolio should ideally not be allowed to drop. For example, suppose your base rate is 15% returns. If the average returns fall below 15% returns or above 15% returns, you can actively manage your portfolio. Continuous research, analytical judgments and critical evaluation to maximise value are generally recommended. You can also buy, hold or even sell assets comfortably.
Seek the help of a financial advisor to relocate your assets or change your investment strategy entirely is commended.
To conclude, always keep in mind that it is never too late to give your current portfolio a face-lift. Moreover, it is okay to make blunders along the way as asset allocation is a life-long process of fine-tuning and development.
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