Should market decide your asset allocation strategy?

Prashant Sharma

For most investors selecting an asset allocation strategy is the key decision when building a long-term investment programme. However, the recent incidence of extreme volatility in markets has raised questions about the best way to follow asset allocation.

One should look for investments that will earn enough to outpace the cost of living. Asset classes generally include stocks, debt (Govt. Securities, Bonds), commodities like gold or silver and property. Your risk tolerance and investment objectives should be the key factors while choosing what percentage of your investments should be put into each of these asset baskets. Asset allocation involves making hard decisions about which assets to buy and what ratio of each asset to hold.

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Once an asset allocation is determined and invested, the best decision is to stay invested and not tinker with the portfolio too much. Investors should understand that the chances of meeting their goals will not be maximised by chasing the latest market trend but by defining and sticking to appropriate asset allocation strategies over the long term. One should not indulge in altering the portfolio for interim market changes.

As falling markets make investors nervous, it is advisable to spread your investments across asset classes. A good asset allocation strategy can help you make prudent investing decisions. Here are some strategies that investors should follow in volatile market conditions.

Be disciplined
Disciplined investment strategies such as rupee-cost averaging can help even out market instability. Rupee-cost averaging is the practice of investing fixed amounts in equities at fixed periods of time. As time passes, your average price per share is reduced and helps you withstand a volatile market. This strategy makes the market variations work for you and decreases the risk of investing all your money just before a market decline. Invest for the long-term
Enter the market with a long-term investment horizon. Long-term investing allows you to be committed to a sound investment plan that begins with a proper asset allocation suitable to your risk tolerance over a period of time. A long-term investment approach typically ranges between five to 20 years. It is nothing but a mindset that offers perspective and discipline as you work towards your financial goals. More importantly, it helps you from making mistakes based on your short-term perceptions. Be realistic
While setting prospects from any investment make a realistic estimation of the returns you anticipate from the investment. Past performance only presents a sign of the historical returns and there is no guarantee that history will repeat itself. Keep your emotions at bay
Don't let your emotions drive your decisions. One should stay focused on long-term investment goals to help ensure your plans stay on track. A purposeful and planned examination of the situation, taking into consideration the investment objectives and time frame, is an important prerequisite for achieving financial success.

Eliminate the need to time investment decisions
It can be alluring to react to market volatility by trying to time the market. But effectively timing the market requires you to make two correct decisions that are complex to make: exactly when to buy and exactly when to sell. This is a risky game to play. Moving in and out of the market by timing its ups and downs is an art that even the most experienced investment professionals have not mastered. Regular investment — in both rising and falling markets — should produce more consistent results over time. Stick to your strategy
Select an asset allocation that aligns with your long-term goals, time horizon and risk tolerance. As your objectives and risk tolerance change, make amendments to your allocation and continue to rebalance to keep the strategy in control since rising and falling stock markets are a fact of life.

Rebalance
Rebalancing is a disciplined method of maintaining proper allocation to each asset class in your portfolio. Besides keeping your asset allocation on board, rebalancing can help ease the risk in your portfolio. Periodic rebalancing also assists in reducing the chance that your portfolio will be overexposed to one particular asset class. In general, it’s a good idea to rebalance your portfolio at least every 12 months. This control helps you keep your asset allocation on track.

Key principles
- Setting a suitable asset allocation strategy for your investment goals
- Sticking with that strategy as long as your personal situation remains steady and not trading for market timing or a panic situation
- Performing due diligence on the investments that you are considering for your portfolio
- Monitoring your portfolio and rebalancing it Conclusion
Asset allocation accounts for the majority of deviation in investment returns, therefore research efforts should be focused on examining and adjusting asset allocation rather than market timing or security selection. Choosing an appropriate asset allocation strategy and accomplishing periodic reviews will ensure that you retain long-term investment goals and attain the desired return with the lowest amount of risk possible. (Prashant Sharma is Chief Investment Officer – Max Life Insurance; the views expressed by the author are his own and do not in any way reflect the views of the company)