Smart investing: Why asset allocation holds the key to wealth creation

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Published: January 24, 2018 3:57:31 AM

In times of uncertainty and a looming election year, go for a customised Investment Policy Statement. Alternatively, follow the three bucket strategy, which looks at cash-flow and liquidity during the time horizon.

smart investing, asset allocation, key to wealth creation, investment world, cryptocurrency, investors, trading sessions, bse sensexIt was only a month ago that bitcoin was the most spoken word in the investment world.

It was only a month ago that bitcoin was the most spoken word in the investment world. After rising 10 times in less than 45 days, the value of the cryptocurrency has now fallen over 40% from the highs, With this downslide, investors’ euphoria has also ebbed. Meanwhile, the 30-share BSE Sensex has gained more than 1000 points in the last four trading sessions to cross the 36,000-mark. Globally, crude prices are reaching new heights which is pushing up prices of diesel and petrol to a multi-year high in the country. Banks have raised MCLR rates, which will mean that your home loan rates, if linked to MCLR, will also rise. The Federal Reserve of the US is also contemplating to raise the rates which could mean a flight of foreign capital. The Budget is due on February 1 and there is talk of taxing capital gains in equity above one year. Setting investing milestones Investing is a journey and not a destination. Milestones are met and new milestones are set. It’s a continuous process. So for those who had been investing in the period 2006 to 2008 and those who have started investing post 2014, the investing journey has been different. Smart gains followed by deep corrections followed by sharp gains, consolidation, correction and again gains. The returns from the asset classes also varied. Gold was the sheen in the period 2003 to 2011. Real estate was the go-to investment till about 2013. Debt funds was another steady asset class.

And in the past 18 months, the TINA (There Is No Alternative) factor has propelled equity asset class into a different stratosphere. As an investor, the only framework is asset allocation. In times of uncertainty, confusion, and looming election year, it is recommended that you have a customised IPS (Investment Policy Statement) in place, which will ensure that you are in command . And if you are too lazy to initiate an IPS, follow the three bucket strategy, which basically looks at cash-flow, liquidity during the time horizon. The bucket approach to investments In the first bucket, your liquidity, emergency funds and cash flow needs for up to five years are considered. Here you would not allocate the corpus to any asset class which has volatility and /or can erode your capital.

The second bucket could be of 5-10 years and serve the purpose of wealth creation and milestones and has allocation to equity asset class and/or real estate. The returns here can be volatile or steady. In the third bucket, you can have investment, the corpus of which is required only after 10 years. In this case, extreme volatility can be endured. Hypothetically, if the equity markets in India correct by up to 30% and your investments are down by 40% and then over the next 10 years, you can see the portfolio grow by more than 5 times (if as an investor, you held on to your investments, post the 2008-09 market crash, the equity portfolio would have delivered an annualised return in two digits.)

In fact, over the last 16 years, the Sensex has moved from 3300 levels to over 35000 levels or over 10 times and individual stocks have grown multiple folds. Despite many events, the equity markets grew. Demonetisation was supposed to be negative to the markets in the end of 2016. But the Sensex delivered a return of over 27% last year. So, to conclude, follow asset allocation and understand your need for cash flow and liquidity needs. Investing with a time horizon after taking into account the cash flow and liquidity needs along with asset allocation holds the key for wealth creation in the long-run.

The writer is managing partner, BellWether Advisors LLP

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