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What Asset Allocation is

“Remember XYZ stock I told you about 3 months ago? It is up 80% since then”, “ABC ekdum solid hai. Just jump in”, “PQR kya lagta hai?” Sounds like familiar party conversation…or something that you watch financial channels for?

If your end game is to have fun discussions at parties, this is fine. But if your purpose is to protect and multiply your wealth, or to optimise your portfolio, you are frankly approaching the problem from the wrong end!

Why? The answer takes you to Investing Basics 101. And it is to do with Asset Allocation.

Depending on the study you read (and there have been many, conducted over decades), you will find that fully 85% to 92% of the returns of a portfolio come from asset allocation!

You got that right! 

Specific stock selection, which eats up most of your/ your adviser’s waking hours contributes only 10 to 15% of the returns.

Moral of the story: it does not make sense to concentrate your resources and time on security or stock selection.

But all the talk you will hear from Portfolio Managers is how good they are picking stocks and great bottom-up winners.

The uncomfortable point is: bottom up stock picking is a very very difficult art and nobody in the history of investing has been able to do them successfully for decades. Yes, not even Warren Buffet. 

Just go and see his record in the past 15 or 20 years and you will see an investor who has missed practically every single multibagger that the US market has given in this period: Amazon, Netflix, Domino's, Google, Apple (he bought way too late), Facebook, Microsoft, etc. 

And an investor who has consistently underperformed the stock indexes.

This is PRECISELY the problem with the "sexy" bottom up stock picking approach. Everybody is relevant in a period. And one fine day, the market changes, and you and your strategy become irrelevant. 

Therefore, when picking people to manage your money, check the approach and their strategy.

The Golden Key to Investing

Most investors fall in the very familiar trap of getting over exposed to the hot asset class of that era. 

But the key point to always keep in mind is that if you start playing every innings thinking that you are going to get a hundred runs, you are never going to be successful. Markets change, sometimes they become easy, sometimes very tough.

The key to successful investing, over the long term,  is to have every major Asset Class in your consideration set: across countries & currencies and across investible assets: Equity, Fixed Income, Real Estate, Precious Metals, Other Commodities etc

The Mantra: There is always a Bull Market somewhere in the world, even as there is a Bear Market elsewhere at the very same time!

View this: Technology in 1998, Emerging Markets 2004-07, Commodities: 2003-08, US equities- Tech: 2010 onwards, Japan: 2013-15, Global Fixed Income: 2009 onwards.

Even more recently, 2018 and 2019 have been extremely difficult periods for Indian stock markets.

Barring a handful of stocks, most have been in the negative territory. 

But in this very difficult 2019 period, First Global's Global Portfolio returns have been up 40%! 

That's the beauty of Asset Allocation. 

To optimise your portfolio, it is important to have all asset classes in your consideration set and carry out Dynamic and Tactical Asset Allocation.

From the desk of:

Shankar Sharma & Devina Mehra

If you want to know more about our Global and India investment products, please drop us an email on [email protected], and we will get in touch right away.

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