The year 2018 has been a reminder that successful investing requires patience and fortitude. Both equity and fixed income investors had a difficult year, as did investors whose asset allocations were misaligned with their risk tolerances. Asset allocation, as always, played a significant role in portfolio performance and volatility.
Asset Allocation – Benefits Over The Long-Term
One of the primary reasons, why I ask investors to focus on asset allocation is because approach works over longer periods – as market fluctuations are often liquidity-driven anomalies persistent for a temporary phase. Equity is generally driven by liquidity and not by fundamentals and, at some point; as investors, you need to start looking at valuations. Though there will be short-term aberrations such as in 2018, long-term performance of any asset class has to be based on fundamentals, only then can it be sustainable.
Diversify with seriousness
Asset allocation compels one to consider diversification with seriousness. I believe that diversification of your portfolio should be based on long-term rules — age, risk appetite, time period to goals, etc., irrespective of the movement of these asset classes over short time periods. As long as an investor continues to rebalance their portfolio based on their pre-decided asset allocation, their portfolio is likely to be safe from volatility-driven risk.
Automatically factor in the power of compounding Buying low and selling high, automatically happens when one regularly rebalances the portfolio. This can add around 4-5% to the portfolio returns in the long-term. That is why portfolio rebalancing is called as the ninth wonder — just like compounding is called as the eighth wonder of the world.
I believe that staying true to asset allocation principles in the context of individual goals and risk appetites remains as important as ever. Equally important will be playing the long game; that is, extending investment horizons to years, not months, and employing tactical strategies to benefit on the margin from volatility. In other words, a sound portfolio structure, a small number of tactical decisions and otherwise staying the course should remain the operating mantra for investors in the next financial year.
Rahul Jain, EVP, Edelweiss Wealth Management