Wealth creation: Proper, goal based, asset allocation plan a must; 4 points to follow

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Published: January 18, 2017 6:36:18 AM

To build wealth in the long run, an investor must have a proper asset allocation plan

The Sensex has risen only 1.6% in the past two years.The Sensex has risen only 1.6% in the past two years.

FOR direct equity investors, tracking the benchmark indices since December 2014 has been disappointing. Equity as an asset class, which has been touted as the alpha generator, has not delivered. The Sensex has risen only 1.6% in the past two years.

But then, for an asset to generate returns there has to be a reason, an environment to grow and deliver. Geo-political events, domestic economic and political developments also contribute to the performance of an asset. At the same time, stock specific direct equity as well as equity mutual funds have witnessed double digit returns in many cases. So then what is the mantra?

Process of investing

Let us remember that we invest in the present, based on the past performance or data, for the future. The future is unknown and unpredictable, and the past is actually history. What remains is the present. And to take an optimum decision in the present, what is required is a process. Investors mostly ignore the process.

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The easiest thing to do and follow—is to look at the latest growth stories and concentrate on the returns. This is what the herd follows and executes well. But then, each of your dreams and aspirations are different and unique.

We execute what is easily and readily available to follow. However, carrying out a decision based on ease of availability may not necessarily help you reach your financial goals.

Equity investment outlook

Equity as an asset class is volatile and the returns can be lumpy. Between 2002-07, the Sensex has delivered CAGR returns of over 40%. During 2014-16 it delivered negative return. However, if you look at the average, it reflects a more positive return for the entire period. For instance, in December 2002, Sensex was at 3377 and in December 2016 it was at 26,626—an absolute return of less than 7%.

Statistics as a tool has to be seen and observed and used in the right context. Longevity in the investing horizon needs to be considered; setting milestones for entry or exit is necessary. As the world is integrated, movement of funds based on event or action in any part of the globe is enough for a kneejerk reaction by the markets. Do keep a track of important geo-political developments.

Debt investment outlook

Debt funds delivered double-digit returns in many cases as interest rate was tapering south. But will it be the same this year, too? This looks unlikely. You need to consider the credit risk of the paper you invest in and the default risk of the companies you invest in. As liquid mutual funds have been the safest instrument, one can consider investing here, especially when one is not clear on the debt outlook.

Gold outlook

Gold moves as per the geo-political outlook and it will be wrong to take a guess. As an asset allocation tool, one could have an allocation. With excess supply in real estate, an end user must look at price points and discounts to bargain.

To build wealth in the long run, an investor must have a proper asset allocation plan through an investment policy statement. As investing is not an easy task, one must look at goal-based asset allocation strategy. That will help to save and invest prudently.

The writer is founder and managing partner of BellWether Advisors LLP

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