Does your Investment Portfolio have accelerator and break?

When Sandeep wanted to purchase a new car he decided to go for test drive. Before taking a test drive he asked various questions to salesman. One of the question that he asked was how fast can car accelerate? He was concerned about the speed. After starting the car, he only used accelerator for sometime. When a time came to apply break, he realized that the car had no breaks. Do you find this weird? Ask any experienced driver. Whenever a person sits on a driver's seat in an unknown car, the first thing that he checks is the break. While accelerator is needed to move ahead, no driver in world will ever even start a car if it does not have proper break.

In an Investor's camp, one of the participants asked me a question. "Since last few months gold has not given good returns, do you think it makes sense to hold gold in portfolio?"

Similar questions have come up regarding validity of equity in the portfolio as well. These kinds of question come up when a particular asset class has not yielded desired returns in foreseeable past.

When we look at our portfolio, we always look at the returns it generates. It is like driving a car which has only accelerator. It's the most risky thing - A sure shot case of accident.

Different asset classes in our portfolio act as accelerator and break at different point in time. Therefore it is important to have all of them. The proportion of it may change based on your financial goals but do not discard anyone purely because they have not performed in past.

Usually debt and equity have inverse relationship. When debt is giving returns - like in current time where FD/Bond rates are high, equity is performing badly. However do not consider equity as poor performer. Instead think of it as break of car. If you go all out in investing all your funds in FD/bonds/debt funds when situation will turn and equity will start performing you would be left out.

Similarly when equity is doing well - behaving like accelerator of car - do not invest everything in equity. Invest portion of your assets in debt based instruments like FD/bond/debt fund etc. because at that point in time they will be your breaks. When equity market will fall, your break will bail you out.

Gold has a different path. It is does not move either along with equity or along with debt. There are long periods when it acts as break and then suddenly for few years it will act as accelerator.

Unfortunately no one knows which asset class will act as accelerator and which will behave like break. Normal human being's tendency is to look at past performance and take call in future. This is wrong strategy. An asset classs which was break in past may suddenly turnout to be accelerator in future and vice-versa. Therefore keeping in mind your financial goals, create a portfolio which will have all asset classes.