WHAT IS ASSET ALLOCATION
Asset Allocation, simply means, investing money across asset classes, namely equities, bonds and cash. It is the key ingredient for any investor wanting to create wealth in the long term. Asset allocation is also important because different asset classes, due to their inherent nature, behave differently. Equity, which represents ownership in a business or enterprise, is volatile in nature and tends to go up and down in the short term. On the other hand, debt, which represents lending money to a business or enterprise, is relatively more stable and provides regular income in the form of interest. Diversifying the client's investments across different asset classes will result in diversifying the investment risk and create a well balanced portfolio that can offset the impact of market volatility.
PORTFOLIO REBALANCING
Values of individual asset classes can go up and down in line with the underlying market movements. While this is no reason for the client to panic, it is important for the client to review his initial asset allocation with the current asset allocation and make course correction through portfolio rebalancing. Portfolio rebalancing will ensure that the client sells equity when markets are expensive and incrases equity allocation when markets are cheap.
HOW TO DETERMINE THE BEST ASSET ALLOCATION
Asset classes vary on the basis of their average returns and volatility. Equities have the potential to give higher returns but the volatility of the returns is also high. Debt is relatively more stable with annual coupon payments.
The best approach to asset allocation is to find out the risk appetite of each client. The greater the appetite for risk, the larger the share of the portfolio that can be allocated to equities.
Risk appetite may differ from individual to individual based on his investment horizon, his ability to bear loss, current financial status, current job status, social background etc. These are some of the factors affecting risk appetite for any investor. The NJ partner is equipped with tools like AIS (Automated Investment Solutions) through which he can determine the right asset allocation for the client based on his understanding of all these factors.