Portfolio Diversification Will Always Come To Your Rescue

Portfolio Diversification Will Always Come To Your Rescue
Portfolio Diversification Will Always Come To Your Rescue
Deepika Asthana - 12 March 2020

I was recently chatting up with a friend of my father’s, a 62-year-old gentleman.

That day he was rather smug and was generously sharing nuggets of wisdom with me. He has always held multiple savings bank accounts. At last count, this number was 7. Over the years, there have been more than a few occasions on which I must have advised him to trim down his bank account holdings and keep his money either invested or in a maximum of three accounts. However, it seems like he has had the last laugh.

You know that you are living in kalyug when even your allocation to savings accounts requires to be diversified. Traditionally, any money kept in a savings bank account was considered nearly risk free because the bank “had to” pay you your money back. While regulation ensures that this is still true, extenuating circumstances which are now becoming a little too frequent for comfort, have contributed to an additional dimension of risk in savings bank accounts.

The prevailing economic and consequently equity and debt market conditions underscore the importance of portfolio diversification and asset allocation. In uncertain times, it can be challenging to accurately assess the impact of negative and often unknown developments on portfolio assets. An astute asset allocation strategy that is tethered to the principles of portfolio diversification can help investors mitigate the impact of adverse events/developments on their portfolios. A well-diversified portfolio is one that is invested across asset classes in such a way that the overall risk of the portfolio is contained while it is well-positioned to capitalise on upside movements. However, it is unlikely that you will achieve optimal diversification just be investing in multiple asset classes and investment instruments. This is where asset allocation plays an integral role. Understand your risk return requirements and then spread your investments across asset classes in certain proportion/weights. When asset prices witness sharp movements, ensure that you periodically rebalance to adhere to the asset allocation strategy. Following this strategy judiciously will not only mitigate portfolio volatility but will also give you an opportunity to find investments at compelling valuations in bear markets and sell investments and lock-in gains in bull markets.

Maybe it is too soon to jump the gun and reassess portfolio allocations. However, it is important to understand that all investments, even money kept in savings bank accounts have a certain element of risk. Do take this risk into consideration when crafting out a long-term asset allocation strategy.

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