In our previous series of Thursday Trivia, we touched upon the definition of Asset Allocation and three strategies to achieve the same namely, Strategic Asset Allocation, Tactical Asset Allocation and Dynamic Asset Allocation. Following which we got various questions on emails, which we will answer here. Certain questions have been asked twice, so we have consolidated them.

To answer these specific questions, we have requested Mr. Saurabh Mittal, Founding Partner of Circle Wealth Advisors. His rich experience always helps to uncover deeper aspects on the subject of personal finance.

Following are a few questions we have shortlisted.

Question 1 : Hello, I am just starting my career. Would asset allocation matter to me? 

Answer : Asset Allocation is not just a factor of age, but also of the goals you want to achieve. It also takes in to account your risk profile. As a rule of thumb, your equity allocation should be 100 minus your age. But this is just a broad view of how allocation should be. Once you have created an emergency fund (which is around 3 months of your expenses saved in separate basket) and want to start saving for your long term goal of financial freedom then all investment towards this goal can go to equities.

Question 2 : Is there any strategy to Asset Allocation other than the three which are mentioned during the series?

Answer : Yes, there are several other strategies for asset allocation apart from the ones mentioned in the series. In our experience different strategies work for different people. But the safest form of asset allocation is Strategic Asset Allocation which helps reducing the risk and volatility on investments immensely.

Question 3 : My primary investment is in real estate, how can I do Asset Allocation for the same?

Answer : Real Estate by nature in not a liquid investment. Once you have a strategy in place and have decided the allocation in different assets, the only way to execute the strategy is by selling the real estate. This is how it works with not only real estate but any other asset class. To rebalance the asset allocation you would have to sell investments in assets that have become overweight over a period. The only draw back with real estate is that to rebalance the same you cannot sell it partially.

Question 4 : Can we use crypto currencies for Asset Allocation? If yes, then under which asset class it would fall?

Answer : Any asset in which you invest becomes a part of asset allocation. Its desired that you take exposure to that asset to the tune of its requirement as per your strategy. Crypto currency as the name suggest is a currency and a mode of payment. In our view, since it does not have a cash flow of its own, it should be treated as cash equivalent as an asset class.

Question 5 : Which strategy would work for a retired individual?

Answer : It again depends on the number of years left for the consumption of retirement corpus. For people who have recently retired, we advice people to invest through bucket strategy. Where the money required for consumption in next 3 years should be invested in debt funds and balance in equities. This should be rebalanced every year and the debt fund should be funded such that it is adequate for next three years of expenses. This strategy not only helps in having better longevity of the corpus but also brings a more certainty to the cash flow in terms of systematic withdrawal plan from debt funds.

Question 6 : What concerns must be taken in order to switch from Strategic Asset Allocation strategy to Dynamic Asset Allocation strategy?

Answer : Dynamic Asset Allocation is more focused on the current market conditions as compared to Strategic Asset Allocation. We advice that, Dynamic Asset Allocation should be done with the help of experts. Also it can be applied only to a particular asset as well. For example, as a strategic allocation if you decide to have equity allocation of 70% in the portfolio. This 70% portion can be dynamically managed.

Question 7 : What role do current market conditions play in the Asset Allocation decision-making process?

Answer : Strategic Asset Allocation process helps in ignoring market movements and conditions. While taking important decisions with our money, usually a strong reliance on given on market and it’s past performance, however with implementation of the above mentioned process, such actions are not to be taken into consideration. It’s just important to stick to risk profile and goal profile which has been charted out and rebalance the portfolio on particular time frame which is pre-decided.

Question 8 : Can we do a sector wise Asset Allocation? If for a certain period of time, infrastructure as an asset class is doing well, then can we build our portfolio around it?

Answer : Sector wise allocation can be done through Dynamic Asset Allocation strategy. However, it’s important to note that sector wise allocation would be a part of overall strategy which would include exposure to other asset classes as well.

It has to be understood that, targeting a particular sector is like timing the market. It is a riskier alternative and will need an expert’s advice from time to time. Additionally, it will bring more volatility into the portfolio and increase the transaction costs. Strictly playing the sectors through direct equity or mutual fund is absolutely not recommended.

Please find the link to our previous articles

1. Thursday Trivia ~ Asset Allocation (Series 1 of 3)
2. Thursday Trivia ~ Asset Allocation (Series 2 of 3)

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– Jinay Savla