Asset allocation key to handling market risks and volatility

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New Delhi | Published: September 18, 2018 12:24:14 AM

Having a combination of liquid, multi-cap and large-cap portfolio over the investing horizon should be the approach to reap long-term returns.

The year 2018 has been a year of frustration for investors, both veterans and newcomers.

The year 2018 has been a year of frustration for investors, both veterans and newcomers. Within the Sensex constituents, only the top six stocks have outperformed and contributed to the returns. Could this have been predicted? With hindsight, perhaps?

But then ‘investor returns’ are more a function of individual behaviour as compared to investment return, which is a more of a function of ‘time horizon’. Multiple data points have shown that a knee-jerk reaction is not a good recipe for good returns.

Returns and cash flow
Since March 2018, the investor portfolio has recovered by more than 10%, in majority of the cases. As an investor, we are looking for building a portfolio which can deliver returns and also liquidity, besides cash flow at specified intervals.

It becomes important that attention is paid at the time of portfolio construction and the expectations set on the returns part. We need to understand that there are periods of high returns, low returns, no returns and negative returns. We need to go through all of these to get any long-term returns. Remember: Investment Returns v/s Investor Returns.

Again, as an investor we need to look at the portfolio based on the asset class which constitutes the holdings. Each of us have a unique risk appetite, risk capacity and risk tolerance. Each of the above terms are unique but we tend to assume it as the same.

Look at asset allocation
At all times having an asset allocation should be the approach, which should be in line with our individual risk tolerance and risk appetite. Having the expectation that at all times all the holdings within the portfolio will be in black is too optimistic a belief. The equity component of the portfolio will face volatility and can be in red for extended periods of time.

The past data points have shown that investment held over multiple time horizons in quality holdings have made the portfolio grow. Even after a drawdown of over 40% during the period 2008-09, the equity portfolio has delivered an annualised return of over 14% over a period of 10 years.

Another important point to note is how as an investor we behave and react. Our behaviour plays an important role in the investment journey. In the investing journey there are phases: Accumulation, followed by consolidation, and finally, distribution. And for each of these phases, the investing strategy varies. One needs to identify which stage of the journey one is in.

In the coming months, there are events as in elections in multiple states followed by a general election, which will keep the markets volatile. Staying away from the market is not the right approach. As an investor it will be prudent to have the asset allocation in place if you do not have one already. Having a combination of liquid, multi-cap and large-cap portfolio, over the investing horizon should be the approach to reap long-term returns. Always remember that it is our emotional quotient which will determine our progress in the investment journey and growth of our portfolio.

-The writer is managing partner, BellWether Advisors LLP

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