Do you love to have junk food and want to have it every day? But practically, you cannot have it daily because it can never grab all the nutrients required for your body making it risky for your health. Hence, there should be a proper balance of nutrients for making a healthy lifestyle. Likewise, the same logic works for your investments. A single asset class could risk your overall portfolio so, there needs to be a proper balance between different asset classes to reduce risk in your investments. Therefore, one should maintain balance by choosing the right asset allocation strategy according to his investment objective and risk profile. 

Before moving forward with asset allocation strategies, let's first understand asset allocation. 

Asset allocation and its’ benefits: 

Asset allocation is the process of dividing an investment portfolio among different asset classes such as equity, debt, real estate, commodities and cash. The purpose of asset allocation is to create a diversified portfolio that maximizes returns while minimizing risk. Asset allocation is recommended to be followed by investors because it can provide several benefits such as:

• Goal Setting: Asset allocation allows you to set clear investment goals, objectives and expectations. By determining your investment goals and the time horizon for achieving them, you can create an asset allocation strategy that aligns with your financial objectives. 
• Balancing Risk & Returns: Asset allocation can help manage risk by spreading investments across different asset classes (diversification) with varying levels of risk and return potential. The idea is that by allocating assets among different asset classes that have low correlations with each other, it is possible to minimize portfolio risk while maximizing returns
• Decision-making: By maintaining an asset allocation strategy, investors can avoid making emotional decisions based on short-term market movements and help reduce the risks of wrong decision-making and benefit from market opportunities. 
• Portfolio performance: Asset allocation has been found as the most important determinant of long-term portfolio performance as against investment /fund selection and market timing. It helps the investors achieve more consistent and better returns over the long run.

It would be interesting for investors to know to what extent does asset allocation determine the long-term performance of the portfolio? A few of the important studies done in the years 1986, 1992 and 2011 found that asset allocation accounted for approximately 93.6%, 91.5% and 95% of the variation in returns. As investors, we should not be concerned about the exact percentage. What is important for us is to understand the simple fact that following an asset allocation strategy religiously would determine how well our own wealth creation journey will take shape in life. 

The main asset allocation strategies: 

1. Strategic Asset Allocation: This approach involves setting a long-term target allocation to a mix of different asset classes and periodically rebalancing the portfolio to maintain that target allocation. The target allocation is based on the investor's goals, risk tolerance, and investment horizon. This strategy involves periodic rebalancing of the portfolio to maintain the target allocation and the allocation here does not change with the influence of the market. Say, for example, you have chosen 50:50 asset allocation, so you allocate Rs.50 in equity and Rs.50 in debt. A year later, the investment of Rs.100 grew to 114, Rs. 60 in equity, and 54 in debt. Now the portfolio will be rebalanced to the original portion of 50-50, i.e. Rs. 57 in equity and debt respectively. 

2. Tactical Asset Allocation: Tactical asset allocation is a short-term approach to portfolio management that involves making adjustments to the portfolio based on changes in market conditions or economic outlook. The goal of this approach is to take advantage of short-term opportunities or mitigate potential risks. Unlike strategic asset allocation, tactical asset allocation does not have a fixed target allocation. Instead, the allocation to different asset classes is adjusted based on the investor's expectations for future market conditions. For example, if an investor expects interest rates to rise in the near future, they may reduce their allocation to debt and increase their allocation to equity. The idea is to make adjustments to the portfolio that are not necessarily based on the long-term outlook for the asset class, but rather on short-term fluctuations in market conditions.

3. Dynamic Asset Allocation: Dynamic asset allocation is a combination of strategic and tactical asset allocation. This approach involves setting a target allocation to different asset classes, but with the flexibility to make short-term adjustments based on market conditions. The adjustments are typically based on a set of rules/logic that takes into account market conditions, economic indicators, and other factors. A dynamic asset allocation strategy may increase or decrease the allocation to equity and debt from time to time as per some rules & logic. This strategy can be more responsive to market conditions than strategic asset allocation, but it can also be slightly more complex and difficult to understand and implement on our own.

Deciding upon an asset allocation strategy:

Each of the asset allocation strategies has its advantages and disadvantages, and the choice of strategy largely depends on the investor's risk profile and investment expectations. However, while determining any strategy, one should understand that the asset allocation is for the entire portfolio, including all your investments in traditional avenues like bank FDs, PPF, small savings, real estate & gold, i.e., anything which has been made for investment purposes. Thus, deciding and following an asset allocation just for your mutual fund portfolio is meaningless as it should be at the overall portfolio level. Investors who are following a financial plan are a step ahead as they have a clear target and time horizon in mind. Thus, the asset allocation can now be decided for each financial goal on the basis of the investment horizon, the required returns for the savings available and the risk you can take on it. 

The Bottom Line 

Determining an asset allocation strategy and the discipline to follow it should be the basic, core activity in your wealth management journey. This is not a one-time decision, but a continuous process that requires monitoring and periodic adjustments to ensure that the asset allocation strategy and the actual asset allocation remain aligned with the investor's objectives. It would be best if one approaches the experts who can help simplify all these things and help you manage your asset allocation in an effortless manner.

Are you the one who used piggy banks in your childhood to store all the money gifted to you by your relatives? Do you also remember getting happy at unexpected big amount of money you managed to save?

For most of us, the simple piggy bank was our first exposure to the concept of savings. Today, probably in the digital age, the piggy bank is seemingly lost somewhere. The world has changed and children today have much more exposure to finances and money. Teens today are one of the most sought after consumers for a large market, not just toys but things like clothes, entertainment, education, consumables, gadgets, games and so on. In such a world, our intent of exposing them to the basic personal finance principles and building good habits towards finance is a big challenge.

Its time for us too to upgrade our approach. During the adolescent and character building years of children, it becomes very important that we also build good money management habits and understanding amongst our children. The broad objectives for us as parents can be to:

1. Give understanding on the importance of money 
2. Make them comfortable and confidently in handling money 
3. Make them capable of managing money safely 
4. Make them financially responsible 
5. Develop enthusiasm for them to learn more and start saving for future 

As parents who also happen to be investors, we surely can do a lot on this front with out children, especially when the usual academic education does no justice to this very critical aspect of life. Here are a few ideas on how we can pursue our objectives on money matters with our growing children…

Pocket money:

In many ways, the pocket money to children is not different than the salary you earn. This simple understanding opens up to a lot of things which can be done with the pocket money. Pocket money is often the first taste of financial responsibility for many people. Giving your child a set amount of money on a regular basis, as well as the responsibility of paying for something they want, allows them to good money management habit. With pocket money, we can imbibe the principles of budgeting, savings, planning for big expenses, being disciplined & responsible, and so on. So the next time you think of giving pocket money, also think of so much more you can give along with just the money.

Budgets & Pocket money:

Understanding the value of money is crucial during the growing years. With most parents affluent today, they tend to pamper their child and fulfil most of their demands. Doing so, the child may not value money and the effort you have done to earn the same. We can always seek participation of children while planning for household expenses /monthly budgets for the family. You can also encourage them to do some household activities or tasks to earn some extra money besides the pocket money. How about asking them to properly wash your car say once a week and show how much the regular car washer is earning? With digital skills, you can also reward them for completing courses or doing some digital activities on your behalf. Making them understand the value of money will surely impact a lot of other money related behaviour.

Spending Money:

There is no limit to how much children can spend today. From entertainment to dining out, to travel, to electronics, and so on. Monitoring their spending and asking them to limit their expenditure to a set budget is crucial here. As parents, we should also learn to say ‘No’ to a lot of unreasonable demands which children place on us. We can also help our children to learn from our own habits and money behaviour while planning our own /household expenses. So the next time you decide to a buy an phone, why not just have a random talk with your child and ask for inputs? If we show discipline in spending ourselves, the children will surely learn a lot more than preaching them something.

Working with Money:

Handling and dealing with money is another great skill to have. You can ask your children to go and open bank account for themselves. Transfer a bit of money to the bank account and let them manage /handle their money digitally. You may also give them pre-loaded money cards instead of hard cash. Ask them to track their expenses online with budget apps. Having a bank account and letting your children manage it on their own is a real time skill required to be learnt soon.

Investing Money:

Seeing money grow gives a very different level of learning to children. Experience is the best teacher and we should expose our growing children to some real investment /wealth management experience. Share with them how and where you are investing and let them listen to your discussions with financial advisor /MF distributor. It would be the best if we can actually open an online mutual fund investment account for your children along with a bank account and ask them to invest regularly with SIPs. Let them make some saving and investment decisions themselves and let them learn. Ask them to present and discuss with you on their investment choices and performance from time to time. Real-time experience on savings can really make a huge difference to their attitude towards money.

Being careful about money

Last but not the least, with the benefits of digital world, there is a dark side where all types of online frauds and scams are prevalent. A lot of children get addicted to games and there have been cases of spending absurd amounts on such online games. Further, with constant online exposure, children also need to be learn on how to be safe online not just with money but also with privacy and a lot of other things which are very risky. Teach them of all different types and ways of fraud, cheating, scams happening online. Digital security is something that needs to be put on the top of your list as parents of growing children.

Conclusion:

As parents, we wish the best for our children and wish them to build skills, knowledge and behaviour that are essential to be successful in life. We do not wish our children to be attracted to money or materialistic life but a the same time, we should teach them how to smartly use money as a limited resource so that it does not become a problem in life. Learning the virtues of contentment, happiness, sharing, caring, self-reliance, discipline and delayed gratification are the true lessons we should teach our children beyond just money management skills. We are sure, with little efforts and planning, your children will surely be thankful to you for life for what you teach them during these growing years.

We all have dreams and aspirations, especially when we are young. Be it an early retirement or palatial home or a big car. Unfortunately, most of us find it difficult to reach these dreams and have to either give up on grand dreams and set realistic ones or wait till we become too old to afford them. There are only two ways to ensure that you change this. First, earn enough money which may or may not be possible for everyone. Second, walk the easier but longer path of saving & investing.

One of the important pillars of financial wellbeing is proper financial planning. Financial wellbeing is simply where you have more than what you need, and the extra is invested for an even better future. Often, we complicate wealth creation much more than needed. At risk of repetition, we dare say again that we have to go back to the same age-old principles of investing and wealth creation. They are timeless, simple and yet, very easily forgotten. There are still people out there who have dreams and aspirations but do not follow these critical and life changing rules for wealth creation. In this article, we present the seven rules of wealth creation.

1. Time is of essence:

Starting early is half work done. The best time to start investing was when you got your first pay cheque. The next best time was not today, but yesterday! There is no tomorrow, you have got to do it today if you are serious. We all know about the power of time and the power of compounding which can do wonders. But unless you don't start early or asap, the end date for the wonder to unfold will be too late. We have to get time on our side, else we would have to work doubly hard to make up for the lost time.

2. Saving aggressively matters:

Give a 5-year-old child her favourite ice-cream and ask her if she wants to eat it now or give it back and have two next month. What will she do? Often, we are no less than that 5-year-old kid when it comes to choosing between instant vs delayed gratification. We cut corners here and there to buy things we don’t need to show off before people whom we don't like. Frugality and minimalism and the in words today. Instead of spending on riches & luxury, it's always better to spend on upgrading yourself, learning, setting up side-business and save /invest in appreciating assets at the very least. The more focussed and aggressive you are today and the more you enjoy the journey, the sooner you will reach your destination.

3. Asset Allocation, is the key:

We often cannot see the forest for the trees. We lose sight of the big picture and spend more of our time in knowing which fund will perform the best, which is the next big multi-bagger, how my funds have performed, and so on. How does it matter even if your fund level performance is plus or minus a few percentages when it occupies only a fraction of your portfolio? Shouldn’t we really see the big picture? A typical household in India today has huge exposure to real estate and gold, occupying almost half of all the wealth. The other half is in financial assets where again bank deposits, government small saving plans, insurance investments, etc garner a large share. The lowest exposures are to equities and mutual funds - the products which are crucial to exponential wealth creation over the long term. What we are only suggesting is that everyone should have a well-balanced portfolio with the right exposure to the equity asset class as per the risk profile & returns expectations. This will have to be revisited, and the portfolio rebalanced from time to time, periodically and market event driven.

4. Emotions need to be tamed:

Many studies have found that equity markets have delivered very attractive returns over the long term, outperforming other asset classes. This is in spite of all wars, events, crises, pandemics, etc, etc. However, investors have rarely made those kinds of returns. And the reason is exactly these temporary aberrations which tested the conviction of investors and most investors unfortunately failed. Warren Buffett once said, “If you cannot control your emotions, you cannot control your money.” Our emotions and our behavioural biases often cloud our decisions and instead of acting rationally and against the herd mentality, we become part of the herd. We enter markets when it is late and exit early. With all the noise around us and all the easy information available, we try to time markets and make ‘smart’ decisions, when perhaps, even getting stranded on a lonely island without a mobile network would have proved to be financially more profitable! Remember, even refusing to do anything is doing something.

5. Diversification helps, but only to that extent:

We all know that diversification reduces the overall risk of your portfolio. The guiding principle is that not all assets will behave the same at the same time as they would carry different sets of risks and return factors. Diversification at the broad level is required also so that you can play that asset allocation game properly and as per a set strategy which can be executed on an ongoing, periodic basis. However, too much diversification into too many asset classes, products, etc would also mean that a lot of under performing assets sneak into your portfolio. You can’t really make good money betting on all horses in a race. Some experts are also of the extreme view that you diversify if you don't really know what you are doing. So it is a matter of the optimum balance, the right mix of a few important things. One may zero it down to say equity, debt and physical asset classes and have exposure to select financial products /securities within these asset classes and again some limited diversification w.r.t. fund categories, AMC, market-cap, sectors, duration /time to maturity, underlying instruments, etc within these products.

6. Don't miss out on wealth preservation /protection:

All it takes to wipe out your wealth is one unfortunate moment, or event in a lifetime. We have seen many cases around us where families have been pushed back on years of progress in life by a tragedy, business losses, court cases, crimes, accidents and so on. We can't control what can happen in life, although we can be careful. However, we can certainly control the financial repercussions originating from such events such that our financial well-being is not compromised and we are not left at the mercy of fate. Having proper insurance is one sure-shot way of minimizing financial losses and suffering. There are many products out there, both personal and non-personal out there can protect us financially. Explore products related to life, health, personal accident, critical illness, home, motor, fire, travel, shopkeepers, professional indemnity, etc to minimize your financial suffering. The other way to minimize financial risks in life is to not take unnecessary risks (avoidance) and huge bets.

7. Build on yourself. Build multiple sources of income:

One thing very common in all self-made millionaires is that they take themselves seriously. They are clear on what they want, they are focused and passionate, have built good habits, have strong character and display behaviour in line with their image and goals in life. They invest in people, in learning, developing their knowledge and skills, and building networks. Often, they don’t risk everything on one product alone, even though they may be committed to one idea. They would have multiple sources of income, diversifying to things which interest them. They would try to automate /outsource /partner with or hire people in such a way that these different sources of income take very little time of their own. For them, money is not the destination or end goal but its journey, the game that excites them. This is what sets up apart from all of us on the wealth creation journey. Picture yourself what you want to become and be that today.

Have you wondered why your fund seems to have delivered fantastic returns and yet your returns have been on the lower side? Well you are not alone. Any market investment can be said to give two types of returns or performance - first its actual market returns /performance and second, the returns /performance of the investor holding the investment. Most of us would think that the two should be similar, in the same range. However, often the reality is quite different, especially in the long run.

Investor behaviour has been identified as one factor with the highest impact on long-term outcomes. In fact, there is a complete field of studies dedicated to this aspect called as ‘behavioural finance’. The field of behavioural finance deals with investor behaviour in the real world as opposed to the mainstream market assumptions that the market is efficient, and all players act rationally to make optimum decisions to maximise their gains. However, behavioural finance studies have countered this and has shown that there are social, emotional and cognitive factors impacting our investment decisions and we do not really end up investing rationally, which is what we think we do. These behavioural biases undermine our decision-making and impact the investor performance or long-term success in investing. This is much more common than we think and results in the ‘behavioural gap’ that we are alluding to. 

Behavioural Gap:  

Facts and historical evidence across different markets and multiple studies have proven that the market performance has been much higher than the investor performance in the same market /investment across different countries and spanning over many decades. The results are often the same, irrespective of even investment horizon. This difference between the return an investment organically produces over a fixed time frame, and the return an investor in that very investment actually earns, is coined as ‘behaviour gap’.

There is a popular research report published every year by DALBAR on ‘Quantitative Analysis of Investor Behavior’ for past 22 years. Here are the brief extracts from the report for the period ending on 31st December 2022:

As can be clearly seen, the broad stock market in the US has outperformed the average equity fund investor by a huge margin, almost 50%, over the 30-year period. Interestingly, the out performance is seen across all holding periods. Similar results were seen in almost all the past studies carried by DALBAR. Results have been on similar lines by many more studies. 

Closer home too, a recent study done by one domestic fund house for the period from 2003 to 2022 showed that the equity funds delivered impressive returns of 19.1%, but the investor returns were just at 13.8%. The out performance of nearly 38%, compounded, over nearly 20 years of investment is very alarming to say the least. 

The verdict is simple - even though the Indian equity investor has created wealth, outperforming all other asset classes over the past two decades, he has clearly missed creating many more multiples of wealth creation due to his behaviour. 

What should investors do?

As witnessed, one of the biggest roadblocks to investing success is investor behaviour, often driven by biases and emotions. Investors let their biases and emotions dictate their investment decisions. We have often spoken of the cycle of ‘Fear - Greed - Hope’ seen in the markets. Investors typically panic and sell when markets correct and become greedy and buy when markets have moved up. However, avoiding our personal biases, and emotions and making rational decisions in real life is a tough task. 

On the positive side, there are many famous and successful investors whom we know by names and still many who are silently enjoying their success around us. These are investors who have overcome the factors we spoke about above, made fewer mistakes, corrected themselves in time and then played the game well in the long term. So what would distinguish these successful investors and the average equity fund investor? 

Successful investors have been found to portray certain characteristics, unlike average investors. They are more rational, they do not let personal biases impact investment decisions, they are more patient and do not let emotions cloud their judgement, are more focused on the wealth creation journey rather than the money, are research and data-oriented, and they keep the big, long-term picture in mind. As common investors, this can be a lot to digest and copy at one go but we surely can learn and dig deeper into each aspect of our investment journey. 

The true role of mutual fund distributors /investment advisors:

There is an interesting thing. Investors who are guided by qualified experts say, experienced mutual fund (MF) distributors or investment advisors, are likely to have outperformed the average investor. The true role of your MF distributor is not to find the top-performing fund or service your queries. The true role is of managing and even controlling investor behaviour - making sure that factors like personal biases, emotions, ill information, lack of knowledge, etc, do not impact your investment decisions. They would make sure to push you to save and invest more, motivate you to see the big picture and at times, even disagree with you, see the big picture which you do not see and give you conviction and confidence when you need it the most. That’s the true, invaluable role that your mutual fund distributor plays and one cannot really put a price on this or quantify this in terms of the value it can bring to your financial journey. What we can assume though is that if we do follow and seek guidance from our MF distributors /advisors, we would be able to bridge the investor’s behavioural gap by a large extent. With just a couple of percentage differences, there can be life-changing for you when compounded over the long term. 

Conclusion: 

The behaviour gap is the reason we often feel that we have failed to create wealth as much as we could have, given the impressive historical performance of the equity markets. More than timing the markets or product /fund selection, it is how we behave and make decisions at the overall portfolio level that truly matters. It is time for us to also acknowledge this fact, focus inwards and find ways of becoming better investors with time, knowledge and experience. Surely, we are supported and guided by our MF distributors /advisors in this journey. What is also needed is that we listen to them more, make decisions and take action. And let deep, meaningful conversations take place.