Focus On Asset Allocation, Not Asset Location

“My friends are laughing at me!” exclaimed a frustrated Sameer. “I’m not happy with the returns on my debt portfolio. Every rupee invested in these funds has missed out on the Sensex rally. I want a much larger exposure to equity, so please move all my money from debt to equity.” The Sensex’s giddy 130 per cent climb from 26,000 to 60,000 has had a polarizing effect on investors. While one lot of them is fearful of the sharp climb, wants to book profits and exit equity, another lot is determined to throw caution to the winds and increase its equity exposure. Sameer is a case in point. Interestingly, the same investor wished to move his entire equity portfolio to debt to prevent further erosion when the market dropped nearly 40 per cent last year. Loss aversion is a popular theory in behavioural economics, popularized by  psychologists Daniel...