Optimise returns with asset allocation.

The world is yet to come out of the shock of the 2008 economic crash. Several developed countries are yet to recover.

One reason was that assets were grown beyond their intrinsic values. Had good sense prevailed and due importance been given to asset allocation, the damage could have been limited. It’s true that with asset allocation you cannot maximize returns, and at same time during downside it will help you to control the damage and you can optimize the overall returns of the portfolio.

There is a general perception among advisors that if the goal is beyond 5 years all investable surplus should be parked in equity.They are not even ready to rebalance the client’s portfolio even if the market rewards 100 per cent.

There is a major disconnect between the advisor and investors.

An advisor may be convinced about equity and wish to take risks that are based on his risk appetite. But at the same time he/she needs to understand that a large section  of the investing community is yet to accept equity as an asset class and wishes to stay away from it. The minority investors–those investing in equity and related investments–do not hold their investment beyond three years.

As per the latest data available with AMFI, more than 38 per cent of investors hold their equity mutual funds for less than 24 months. This is mainly because of their risk tolerance.

Although the industry data points to a 16-17 per cent compounded annualized return over 15-20 years, it’s still difficult for an advisor to persuade investors to stay invested and not be swayed by other things..

Past returns: The equity market has delivered mind-boggling returns only in a band of a few years in the past 15 years. The rest of the time, it has delivered sedate returns, thus forcing investors to move out of the financial instrument. Shares and debentures accounted for 13 percent of financial savings in the 1990s, when financial literacy levels were low. Although peoples’ understanding of finance has improved, their financial savings by and large  have plunged to 2.9 percent in recent years.

Investors are looking for more stable returns, whereas the  more of a cyclical nature. However, the great returns in patches are yet to instill confidence in the minds of investors.

Diversification, the way forward
If inflation-beating financial instruments underperform for five years, the main question is: What is the way forward to beat the inflation? The only mantra is diversification.  Just as there are different seasons in a year, we need to build a portfolio across assets.

It’s the responsibility of advisors to understand the risk tolerance and risk appetite of customers and suggest portfolios accordingly rather than construct them based on his/her risk appetite.

With such a strategy investors may stay for longer duration with their investments and, in turn, it will help them to create wealth through equity.