GAIN FROM STRATEGIC ASSET ALLOCATION
· Asset allocation is the most significant decision investors can make about their wealth.
· Investors make allocation decisions mostly by default, without thinking about it as a strategy about their wealth.
· A sensible asset allocation decision aligns the assets to the investor’s needs.
· It is strategic as it looks into the foreseeable future and builds the allocation bearing the risk, return and liquidity needs in mind.
· In most cases, investors make asset allocation decisions without considering their own needs in terms of return, risk and liquidity.
· They go ahead with the simplistic notion that building any kind of asset is good for them.
· In asset allocation, three things matter most.
o Why do you need the asset?
o How much should you hold?
o And for how long?
· Therefore, the decision about assets and allocation is driven by the investor’s requirement from the asset and the period after which he needs the money.
· What stops investors from taking sensible decisions about asset allocation?
· The main reason is that most believe that any asset is helpful, even without strategic intent.
· The other reason is that investors confuse strategy with tactics.
· They think asset allocation means they should know when to enter or exit gold, equity or debt.
· They believe they make money only when they get this right.
· They ignore the advice that is aligned to their needs by looking at the market in the recent past.
· They then panic, resign, give up, or turn over-confident about what they should do.
· These emotional reactions may harm their long-term wealth.
· Asset allocation is not about chasing the highest return.
· Different assets do well in different phases of the economic cycle, and no one has perfected the art of predicting.
· The greatest benefit of asset allocation is lower risk, because you do not bet too much on one thing.