Asset allocation is a fundamental basis for a successful investment experience. It remains relevant and effective across market cycles. Historical trends suggest that investors who adhere to the basics of multi-asset allocation tend to emerge wealthier over time. However, many investors often ignore the importance of asset allocation, leading to poor investment outcomes. Since asset allocation helps in risk management and aims to generate steady returns in the long term, neglecting it can be detrimental.
The strategy of multi-asset allocation operates on the principle that all investment asset classes—whether equity, debt, gold, or real estate—are different and have distinct market cycles. Most of the time, they are not correlated. Therefore, diversifying investments across these asset classes offers a protective layer to your portfolio by minimizing asset concentration risks, thereby safeguarding your investment value from sudden and undue shocks.
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Given the current situation where equity assets have become quite expensive, and geopolitical tensions and inflationary pressures persist, the strategy of multi-asset allocation gains much more importance. Past market crises, such as the IT bust of 2000, the 2008 global meltdown, or the recent 2020 pandemic crisis, all indicate that asset concentration can be dangerous and potentially erode investment valuations.
In such situations, an asset allocation strategy effectively comes to investors’ rescue. It is crucial to keep investment portfolios flexible enough to adapt to market conditions. Multi-asset allocation ensures that exposure to highly valued or overvalued assets is suitably and timely reduced while the funds are diverted to other assets for sustained value creation.
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One needs to note that equity is a growth asset that carries its own set of risks in the short to medium term. Debt assets tend to add stability to the investment portfolio, while gold serves as a strong hedge against inflation. Real estate-linked investment instruments can offer better yields to the overall portfolio. However, a concentrated portfolio in one asset class often defeats the purpose of successful investing. Therefore, it is always prudent to invest across different asset classes in suitable proportions to avoid a poor investment experience.
Moreover, it’s worth noting that investors often develop a recency bias, believing that assets which have performed well in the past will continue to do so, while poor-performing asset classes will continue to underperform. This belief is not accurate when it comes to long-term investment horizons. It’s essential to strike a balance between fear and greed, and a multi-asset allocation strategy does this seamlessly across market cycles. Thus, asset allocation aims to provide inflation-beating, risk-adjusted returns in your wealth creation journey by offering the optimum benefits of several asset classes.
Several mutual fund categories like asset allocator funds, multi-asset funds and balanced advantage funds tend to help investors with asset allocation strategies. One may consider investing through these schemes for risk-adjusted, stable and growth-oriented returns. Not only the investment-related stress is kept in check, saving a lot of your time and energy; but investors also enjoy an overall positive investment experience.
Disclaimer: The Views are Personal and not a part of the Outlook Money Editorial Feature