To say that the coronavirus contagion took us by surprise would be an understatement. At the beginning of the year, it would have been hard to predict that a global pandemic would descend upon us and have a huge health and economic impact on countries across the globe. In response to the growing uncertainty that the global pandemic has introduced into our lives, financial assets across the world have been witnessing heightened volatility. The question top most on every investors’ mind is, “how do you safeguard your portfolio from sudden and unpredictable events?”
To say that the coronavirus contagion took us by surprise would be an understatement. At the beginning of the year, it would have been hard to predict that a global pandemic would descend upon us and have a huge health and economic impact on countries across the globe. In response to the growing uncertainty that the global pandemic has introduced into our lives, financial assets across the world have been witnessing heightened volatility. The question top most on every investors’ mind is, “how do you safeguard your portfolio from sudden and unpredictable events?”An optimal asset allocation strategy would spread your portfolio investments across multiple assets such that extreme price movements in any one asset class do not skew the overall returns of your portfolio.
Opting for a Strategic Asset Allocation Strategy
Here are a few things to keep in mind when determining an asset allocation strategy that works for you:
1.Your risk profile - your risk profile will strongly influence the level of risk that you can take and dictate your investment decisions. A host of factors including current and future income, liabilities, behavioural factors and investment time horizon, will determine your risk profile.
2.Your return requirements - your return requirements should ideally be tagged to your goals. As an individual investor, you can have multiple goals that can range from buying a car or funding a foreign vacation to buying a house and planning for retirement. Your goals will determine the rate of return your investments need to generate.
3.Your investment time horizon - your investment time horizon indirectly influences the level of risk you can undertake. Generally, an investor with a long-term investment horizon can assume more risk than an investor with a short-term investment horizon.
Benefits of strategic asset allocation
A strategic asset allocation strategy is like the foundation of your portfolio. It is a static approach to investing wherein based on your risk profile, investment objectives and investment time horizon, you determine the percentage allocation to various assets. Strategic allocation can add value to your portfolio in three ways:
1.Diversify portfolio risk - By spreading your investments across equities and fixed income assets, you are ensuring that the portfolio is able to reap the return benefits of equity investments while leveraging the relative safety of debt instruments. For example, if you have an above average risk profile and a long-term investment horizon, your strategic allocation strategy would dictate that you allocate at least 60% of your portfolio to equities and the balance to fixed return assets.
2.Mitigate the impact of volatility and behavioural biases - It can also guide you in times of extreme volatility or prolonged movements when portfolio allocations might get skewed due to change in prices. This can help investors make optimal decisions in the face of uncertainty.
3.Optimise portfolio returns - Strategic asset allocation not only helps you diversify your portfolio but it can also be instrumental in enhancing risk-adjusted. For example, in a bear market scenario when stock prices are falling, the allocation to equities is likely to fall. Investors can rebalance their portfolio to increase their exposure to equities basis their asset allocation strategy. Over the long-term, this can help investors reap the benefits of investing in equities. A particularly winning strategy would be to continue with your systematic investment plan (SIP) in equity mutual funds and take advantage of market ups and downs to generate long-term gains.
In any investor’s financial journey, there will be several instances when markets exhibit extreme behaviour making it difficult to maintain an optimal investment portfolio. By understanding strategic allocation and using this disciplined approach to asset allocation, investors can avoid making emotional short-term decisions based on current market events and instead, make optimal decisions that can be beneficial over the long-term.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
