Why asset allocation is more important than timing the market

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Most investors believe that the key to accumulating wealth is going in and out of the market at the "right time." But experience and hard evidence over and over again show that trying to time the market is not only hard to do successfully and consistently, it's generally counterproductive. Professional money managers scarcely ever accomplish it successfully on a regular basis. Being absent just a few of the best days in the market can greatly detract from your gains, especially in unpredictable times.

What is asset allocation?

Asset allocation is about dividing your investments across asset classes such as equities, debt, gold, and property in relation to your goals, age, income, and ability to tolerate losses. For example, a 35-year-old will have 70% invested in equities and 30% in bonds, but a 60-year-old will invert the ratio to reduce volatility. The ratio makes your money grow while reducing the likelihood of dramatic losses in one category.

Why it's better than timing

Markets fluctuate in the short term. If you're trying to time your entry or exit, you'll probably be on the wrong side of a market move. But asset allocation mellows this out. If equities decline, your debt and gold might stay even or rise. In the long run, resetting your portfolio every so often to your initial allocation works to lock in gains from higher-performing assets and contribute to the lower-performing ones.

A real life example of timing vs. allocation

Let's say Investor A invests ₹10 lakh in equity mutual funds during January 2021 and holds it for the duration until 2025 without any changes. Investor B tries to time the market and exits in early 2022 expecting a correction, but misses out on the next rally. Investor A, even though going through some volatility, returns a steady CAGR of 12%. Investor B arrives late and receives 8%. Another diversified investor—50% equity, 30% debt, 20% gold—could have made 10%, but with a lot less risk and better sleep at night.

How to find your optimal allocation

There's no single formula, but your age and objectives are a good base to start from. Young investors can tolerate more equity exposure. Retirees need to keep capital intact rather than grow it. The rule of thumb is "100 minus your age" as the equity component of your portfolio. Rebalance and review at least annually. Average out entry cost using SIPs, and don't alter your mix because markets are up or down.

FAQs

Q: Can asset allocation deliver better returns than market timing?

Not necessarily. Ideal market timing will outperform allocation, but it's practically impossible to do all the time. Asset allocation offers a more consistent, lower-risk path.

Q: How do I rebalance my portfolio?

Once or twice a year is most often okay. Rebalancing too frequently can cost without adequate gain.

Q: Is asset allocation for small investors?

Yes. Whether you invest ₹10,000 or ₹10 lakh in the market, a wise mix of assets protects you against shocks and gives you better risk-adjusted returns.