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Real estate investment trusts

The Importance of Asset Allocation in Investment Strategies

Strategic Insights

— 1 min read

Asset allocation, the process of deciding how to allocate investments among different asset classes, is crucial in smoothening investment journeys and maximizing returns. By distributing wealth across assets, investors can minimize volatility and protect their portfolios from market fluctuations. A wise asset allocation strategy can provide the best risk-adjusted returns, as believed by wealth managers, with 90% of long-term returns attributed to proper asset allocation.

Key Takeaways:

  • Asset allocation involves deciding the allocation to equity, fixed income, gold, international equity, REITs, and cash, which helps smoothen investment journeys and maximise returns.
  • A conservative investor may allocate 40% to equity mutual funds, 40% to debt mutual funds/REITs, 10% to international equity, and 10% to gold/silver funds.
  • It is essential to spread wealth across assets to protect the portfolio from market fluctuations and achieve better risk-adjusted returns.
  • Wealth managers believe that 90% of long-term returns come from proper asset allocation.
  • Mutual funds help in diversifying asset allocation by allowing investors to allocate across asset classes using various funds, such as equity-oriented, debt-oriented, and gold/silver funds.
  • Investors should review their portfolios at least once a quarter or in six months to rebalance their assets if any move up or down by more than 10% of the planned targeted allocation.

Statistics:

  • 90% of long-term returns come from proper asset allocation (as believed by wealth managers).
  • 40% allocation to equity mutual funds is recommended for a conservative investor.
  • 40% allocation to debt mutual funds/REITs is recommended for a conservative investor.
  • 10% allocation to international equity is recommended for a conservative investor.
  • 10% allocation to gold/silver funds is recommended for a conservative investor.
  • Investors should review their portfolios quarterly or bi-annually to rebalance their assets.

Sources:

  • "What Is Asset Allocation? Why Is It Key?" by PRASHANT MAHESH, TOI IN THE CLASSROOM (no date mentioned)

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