ASSET ALLOCATION FOR SMALL INVESTORS ... a Theory

ASSET ALLOCATION FOR SMALL INVESTORS

 

Why Asset Allocation

• ? Investing with perspective
• ? To make investments more efficient
• ? To device investment solutions for specific needs or goals
• ? For small investors it is must since the room for error is not there
• ? 93.6% returns explained by asset allocation

What Is Asset Allocation

• Consider different asset classes
• Blending of assets increase risk adjusted return
• Exercise to find optimum portfolio for given risk parameters

 

How to Allocate Assets

• Establish your future goals
• Compare with current income stream
• Establish your risk tolerance level
• Identify available assets and establish their returns, risk (std. Dev) and relationship (covariance)

Asset Allocation Live Example

• We considers five asset classes namely
• Large Cap Equity
• Mid Cap Equity
• Fixed Income
• Cash
• Gold
• We have used hypothetical data for Returns, Risk and Co relation
• We are using Visual MVO (Mean Variance Optimisation) Software

Asset Allocation in Real Life

• Debt and equity are not the only asset classes
• Also consider your job/business into asset allocation
• How to select vehicles to represent various Assets

Why for Small Investors

• No room for error
• Liabilities are well defined
• One has to fend for oneself during retirement
• Our grand parents survived on our parents earnings
• Our parents survived on defined contribution pensions
• We will have to survive on our savings only
• Increased longevity means longer retired period

Asset Allocation – It Is Dynamic

• All parameters of asset classes changes
• Instruments available to take exposure changes
• Your risk tolerance also changes with time age and income level ? Investing is game of probability and hence after reviewing past results future should be considered afresh

 

Asset Allocation Broader Perspective

• Tactical asset allocation
• Age adjusted asset allocation
• Fund manger asset allocation (tracking benchmark)
• Keep eye on inflation adjusted returns
• Alternate investment

Happy Investing