Managing your Asset Allocation Smartly

There are different types or category of assets (investments) in which you can invest like Equity, Commodities, Debt (Fixed Income instruments), Real Estate, Alternative Investments. Each asset class or category varies in terms of degree of risk, liquidity, volatality and expected returns on investment.

The minimum objective of any long term investment of your money is to earn a return on investment that is more than the rate of inflation. If your investments are earning less than the rate of inflation then your wealth is getting eroded in real terms as the cost of goods and services that you will be able to purchase will increase faster than rate of growth of your money.

Before making any investment it is important to consider your current stage of life, your age, number of dependents, your current accumulated surplus, your short term liquidity requirements and your long term financial objectives. Based on this information, one needs to plan asset allocation which basically means deciding what percentage of your money to be invested in which asset class. Also the most important factor to consider is market conditions in each of the different asset classes. For e.g. you might have a bigger risk appetite but if the markets are in strong bearish mood then it is not worthwhile to start making investments in a bear market. So the market conditions at the time of investing is a very critical factor while deciding your asset allocation.

A dynamic smart allocation helps you control risk by reducing your exposure to an asset class when risk is high and increasing your exposure when the risk is low. The key to maximization of returns on investment is to focus on keeping your risks low.  An astute financial planner can help you do such smart asset allocation and ensure that you have the right asset allocation to maximize your return on your investment given your appetite for risk and degree of expected volatility.

Time to switch your Fixed Deposit investments to G-SEC’s

Government Securities (G-SEC’s) are excellent investment option in the current environment for those who only keep their money in fixed deposits. Primary motivation of Fixed Deposit investors is safety of capital and they are highly risk averse. G-SEC’s do not carry any default risk as they are Government Securities that come with soverign guarantee. The ROI (Return on Investment) in G-SEC’s depend on interest rate movement. There is an inverse relationship between interest rates and bond prices. So as interest rates fall,  the return on G-SEC funds will rise. Every 1% fall in bond yields will lead to rise in bond prices by about 6.5%. So if in 1 year bond yields fall by 1%, the return on G-SEC funds will be close to over 15% (around 9% coupon + 6.5% appreciation in bond prices).

So recommend all fixed deposit investors to switch to G-SEC’s. This will dramatically improve your ROI in next 1-2 years. The only risk in G-SEC’s is continued rise in interest rates as increase of more than 150 basis points in interest rates can lead to marginally negative returns on G-SEC’s. But in the current economic environment, interest rates seem to be peaking out and not much hike in interest rates is expected further.

What dominates your mind while taking investment decisions?

What dominates your mind while taking investment decisions? Fear of losing your principal? Safety of capital?

Well, losing principal is not the only risk in investing. People confuse certainty and safety. They think of fixed deposits as safe. They’re not safe. They’re certain because you’ll get your money back, but unfortunately we live in a world where inflation is an issue, so although you may get your money back it will buy you less and less. That’s not particularly safe.

Ideally, one need to balance preservation of principal with preservation of spending power. Investors need a real cash flow – one that grows with inflation. And they can’t get that through fixed income investments or “safe” investments.

A mathematical process of financial planning helps you in quantifying your life goals, prioritize them and determine the return on investment needed to accomplish your goals. A suitable Asset Allocation strategy and Reallocation process will then guide you to in achieving your defined goals.

Do not just focus of safety of principal. Instead aim for meeting your long term life goals. Preservation of capital and preservation of purchasing power of your capital will come naturally, once you think big and keep an eye on your long term life goals.

However it is essential to focus on the process of planning!!!

Have you created your Financial Plan to guide your Investment Portfolio?

Your Investment Portfolio isn’t pulled from thin air or created in a vacuum. Your Portfolio is a tool to get you to where you want to go. You need to realize that you don’t have a portfolio – you really have a plan. It’s very important to understand that your investments must fit with what you’re trying to accomplish and that you must take appopriate risks to meet your goals.

Everything begins with assessing financial goals. You need to look at what’s important to you, what’s essential and what’s ideal. Then look at where you are, where you need to go, where you want to go and what it takes to get there. It is not easy. This procedure is not something you do in five minutes. An overall analysis – in form of a Financial Plan – is the best way to establish the returns needed to reasonably accomplish your goals. One of our experienced Wealth Advisor can guide you in accomplishing the process.

Next important thing is to determine the appropriate risk that can be taken. Risk is not determined by your neighbours or by the markets but rather by your own needs. Knowing how much risk you can take is essential. If you are saving and accumulating sufficient amounts and your goals are attainable, you may not need to take much risk at all. If you take more risk you may inadvertently jeopardize your financial health. On the other hand, if your needs are much greater than your resources, you may have to take on a higher level of risk in order to have a chance to succeed. If you take less risk, you may condemn yourself to a dismal financial failure.

The Financial Planning process will help you determine your Investment Portfolio strategy and determine the appropriate level of risk.