What Asset Allocation is not

The word Asset Allocation is bandied around rather casually these days. Hence it is important to understand what Asset Allocation is not. 

We see the word asset allocation used quite widely and we should say, somewhat lightly these days with many financial advisors and fund managers claiming to do asset allocation strategies.

Only when one goes somewhat deeper into this one realises that the Asset Allocation being talked about is in the nature of large cap versus small cap Indian stocks or moving from value strategies to growth strategies in terms of stock choice within the Indian stock market. 

This combined with some debt allocation, appears to be philosophy underlying the so called asset allocation strategy.

In fact, some of the investment documents we have seen even cite the same studies that we mentioned in the last blog that mention that 85 to 92% of a portfolio returns come from asset allocation, with specific stock selection contributing only 8 to 15%.

The problem? The studies cited take into account a portfolio consideration set that is across countries and across asset classes - not just couple of asset classes in a single country!

So for asset allocation strategy to really work in your favour, your consideration set must include all assets: Developed Market Equities, Emerging Market Equities, Developed market Fixed Income, Gold and Precious metals, other Commodities, Real estate (REITs) across countries and so on.

Just changing allocation across different categories of the Indian equity market or even Indian equity and debt markets is simply not good enough! 

That is like playing football on 20% of the football field - which it is better than not playing at all...but can it really be called football?

Even within the Indian markets, it is important to look at asset classes beyond just debt and equity.

 For instance, of the last 10 years, in 2 years Gold was the best performing asset class in India (partly due to currency movements) and in another year it was the second best performing asset class. In other years, real estate did extremely well. And now through REITs and some other instruments it is possible to get systematic exposure to real estate as well.

When we, at First Global, talk of asset allocation it means that in your consideration set are practically all the investible Asset classes in the world.

The other key is to have a dynamic and tactical asset allocation model, ie assets are to be reallocated based on the tactical view of various asset classes at any point in time.

Just crude measures like at an age of X years you should have 60% exposure to equity and 40% to debt simply don't work if you are looking to protect and multiply your wealth.

An in-depth understanding of the underlying asset classes is also important. Among other things this is to ensure that the Asset classes are really largely uncorrelated. That comes from data and long experience.

Is your money manager well versed across asset classes, across countries, across currencies?

If not, you need to be very careful because you may be getting trapped into the narrow expertise of your money manager, which is fine for him. 

But can be disastrous for your portfolio.

For example, if one has a positive view on commodities and a positive view on Brazil and Russian equity markets, increasing exposure to both may not be really uncorrelated at all as commodity prices drive many of the large company earnings in these two markets.

Currency alone, or a single country exposure, can also change your portfolio return profile dramatically. But more on that another time.

To conclude, investing is about batting like Sunil Gavaskar: a steady, decidedly "unsexy" approach, careful risk management through diversification across asset classes (Gavaskar played shots all around the wickets, and played well across the world, and played pace and spin equally well). 

Bottom up stock picking is a bit like Virendra Sehwag: brilliant when it works. Terrible when it doesn't. Never steady or predictable. So runs come with high volatility or standard deviation.

Who would you want managing your money: Gavaskar or Sehwag?

The answer is obvious, isn't it? 

From the desk of:

Devina Mehra

Want to open your trading account? Email us on and we will get you started super fast! 

Tell Us What You Think:
Accolades & Happiness Under Management

First Global has been widely commended by Global Media. And by thousands of big & small investors worldwide

Subscribe to our fun & thought provoking articles

Contact us on (, to get cracking on building serious wealth!

Follow our buzzing social media handles