Asset allocation, Asset allocation, Asset allocation

February 12, 2025

·       Yesterday’s contest between Manchester City and Real Madrid demonstrated the importance of having an optimal mix of raw aggression/speed combined with a versatile midfield and a solid defense for a winning combination in a game of football.

·       Asset allocation serves a similar purpose for achieving financial goals in life. It has been time and again referred to as the single most important financial decision an individual should be focusing on. However, most of individuals spend time on trying to churn out maximum from a particular single asset class.

·       You need different classes of assets which are suited to different financial objectives and each has a distinct role towards overall financial success.

o Direct Equity/Funds – Equity investments are like the deadly offense of Real Madrid, they are your frontline for achieving your targeted objectives and demand your maximum mind space in terms of strategic planning. These players may get least possession of the ball in the game but when they do get it, its game-on. It’s scoring time and with a right combination of skill and conditions they are the ones that will take you past the finishing line. You cannot ignore them and cannot afford not having them in your team if you want to meet your long term strategic objectives.

Objectives: Compounding, Wealth creation, inflation proof, Long term goals

Tradeoff – Volatile, Outperformance can come in very short bursts

o Dynamic asset allocation funds (with a core of  Fixed income) – They are the midfielders that help control the pace of the game. They need to have ability to switch between offense and defense based on market conditions and are most active for most part of the game. They bring stability to the team and will keep chipping away, working hard consistently and are generally the unsung heroes compared to the stars in offense.

Objective: Portfolio resilience, Mid level returns, medium term goals

Trade off: Less liquid, Susceptible to inflation,

o Liquid funds - Their job is to maintain a strong defense line and ensure that the opposing team does not make inroads into your bastion. They are very critical for stabilizing your team and giving the offense an opportunity to capitalize on opportunities while they stave off opposition attacks.

Objective: Liquidity, Emergency fund, Short term goals, Strategic deployment ability

Trade off: Low returns, Lost Opportunity cost

o Insurance – Is the goal keeper of the portfolio. A goal keeper is idle most of the time while the other team members slog around. Insurance is that  vital cog in team which may appear idle, pointless and a wasted spot instead of a running team member. However it gives the team a chance to survive and fight back another day by keeping out dangerous attacks of Medical emergencies, disabilities due to critical illness or loss of life.

Objective: Thwart attacks on financial health

Tradeoff: No returns, may seem like a dead-cost, but it aint.

o Real estate/Gold – They are those gifted but unpredictable players who do not perform consistently, but when the going is tough and there is chaos all around, they may come i.nto their own and give a spirited performance. During times of global crisis, dysfunctional governments, they can give some respite. You don’t want too many of these stars in your team though.

Objective: Protection against currency printing, inflation, macro economic uphea.vels

Challenges: High risk bets, may or may not pay off

·       The way the team formations between offense, midfield and defense is customized based on opponent, match situation and the desired outcome, there is no cookie cutter approach to financial planning and each individuals financial plan needs to be customized and regularly fine tuned.

·       It is best to have a coach/Financial planner who can help you with these formations and guide you to exploit the best of the situations to meet financial goals and aspirations.