Podcast 6th May 2016
Hi I am Arjun Parthasarathy speaking and this podcast is on “Asset Allocation is a Must but Blind Asset Allocation is Downright Idiotic”
Imagine if your Asset Allocation model told you to keep investing in equities when markets were rising to bubble territories and then after the bubble burst and equity prices have fallen to abysmal lows, the model tells you to sell equities and get into bonds. You have for all practical purposes downsized your retirement corpus following this model.
Many Asset Allocation models follow life cycle asset allocation or allocation based on many other parameters except market, business and economic environment. The fact is asset allocation should only be based on the latter, which is the future expectations of markets, business and economic fundamentals.
Asset allocation is almost an everyday affair, right from businesses evaluating investments to governments evaluating spending. Businesses will allocate assets to sectors that offer the most potential for returns over a period of time in the future. Governments will allocate scare resources to the current and future needs of the economy. Similarly as investors, you should allocate assets to the asset class that is expected to give the most returns in the future.
The advent of Hedge Funds brought about the concept of dynamic asset allocation. Hedge funds were the most opportunistic of investors, moving across asset classes based on expected future returns.
Dynamic asset allocation as a concept has been introduced in mutual funds as well providing small investors a vehicle for allocation assets based on the market environment.
You as an investor too can allocate assets based on the future expected returns from different asset classes. A good knowledge on the fundamentals driving markets, businesses and economies will help you judge the best time to be invested in equities, bonds or gold. You can also take the help of Investment Advisors who help you allocate assets to maximise your returns with a given level of risk.
Asset allocation is gaining all the more importance now given the globalized nature of markets. The movement of capital across the world is determined by policies of central banks, economic conditions and business opportunities. Capital inflows and outflows into markets cause huge volatility leading to gyration of returns across asset classes. Hence it is important to be invested in the right asset class at the right time.
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