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Asset allocation should be reviewed at least twice a year. If equities rise from 60% to 70%, the portfolio needs rebalancing to restore the original mix
Asset allocation is done by considering factors such as age, financial goals, and risk tolerance. (Representative/Shutterstock)
Investors, both seasoned and new, often emphasise the importance of asset allocation, though many beginners may not fully understand its nuances. Asset allocation, the strategy of spreading investments across different asset classes, helps manage risk and optimize returns.
Understanding how to effectively allocate assets can be key to building a resilient investment portfolio. A true investor is someone who understands the importance of asset allocation. Whether it is stocks, gold, bonds, or fixed deposits, investing the right amount in each is what real asset allocation is.
Interestingly, even the world’s biggest investors say this is the real secret to their wealth. That is why asset allocation is so important in one’s portfolio. If one’s asset allocation is right, chances of getting better returns go up.
Asset allocation is done by considering factors such as age, financial goals, and risk tolerance. It is not just about dividing money; it is like a financial story where every character (asset class) has its own role. Some help grow quickly, some support during downturns, and some strengthen the portfolio.
Different Formula For Every Investor
A good portfolio is one where all three are balanced together. Every investor needs a different formula. There is no single formula for asset allocation for everyone. Every investor is different — their income, age, goals, and risk tolerance. So, there is no fixed pattern for asset allocation. One must choose the right mix for oneself.
Asset allocation is based on financial goals, investment period, risk tolerance, and liquidity needs. For example, if a person is young, earning well, and not afraid of risk, a mix of 70% equity, 20% fixed deposits or bonds, and 10% gold could be ideal. This helps benefit from growth over the long term. On the other hand, if one is a moderate risk investor and wants good returns with stability, investing 40% in equity, 40% in bonds or fixed deposits, and 20% in gold is considered good. And if one wants to avoid risk completely, then a portfolio with 70% bonds or fixed deposits, 20% equity, and 10% gold will help sleep peacefully at night.
Why is Asset Allocation Necessary?
The benefit is that if one investment option is very volatile, another gives stability. Suppose all money is put in stocks and the market suddenly drops by 20%. Net worth could crash in an instant. But if the gold portfolio is strong at that time, it can cover a lot of the loss. That is the real magic of asset allocation. When one asset slips, another supports. When the market rises, equity grows. When it falls, gold and bonds protect the portfolio. This way, money keeps growing slowly and steadily without big shocks.
Asset Allocation Strategies
Strategic asset allocation: This is the ‘invest and forget’ strategy. Once the asset allocation is decided, it is adhered to for a long time.
Tactical asset allocation: In this strategy, changes to asset allocation are made from time to time. It is very effective in the short term. For the long term, the set allocation is not changed.
Dynamic asset allocation: This is an aggressive strategy. Here, allocation is changed based on market movements. That is why people who use this strategy see their portfolios change quickly.
Review And Rebalance
Make sure to review asset allocation. Just like cleaning the house regularly, the portfolio needs to be reviewed too. At least twice a year, one should check asset allocation. Suppose the portfolio had 60% equity and 40% bonds, but the market went up and now equity is 70%. Rebalancing is required. This is called rebalancing. If any asset class changes by more than 10%, it is important to make adjustments. This step keeps the portfolio safe and helps it grow steadily.
November 25, 2025, 19:03 IST
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