Asset Allocation is all about Patience, Goals, and Savings!

According to Wikipedia,

Hence, even though the term “asset” may sound as if it implies only to those who have created wealth, in reality, “assets” are much more than just wealth.

Consider this: Make a list of everything that you own that you consider wealth? Once you’ve done that, arrange that list according to their order of importance… So, what’s the first item on that list - the most important asset that you have?

Ideally, that first item on your list should be - Yourself! Because everything on that list that you deem precious is there because either you wish to or you have managed to create wealth. These are nothing but manifestations of your hard earned savings.

This list that you hold has ambitions that you wish to create or have made reality, this is possible because of discipline. Assets are, thus, more than an object. These are ambitions, discipline, and nurtured habits.

And in case your list is not yet as elaborate as you would like it to be, then we could start with a few quick steps to help you create wealth. Just as with any other aspect, creating wealth too has an SOP, only that here SOP translates into – Savings, Objectives and Patience!

You’ve heard this over and over again: Save! Save! Save! Start by looking into your income and expenses. In order for you to start creating wealth, you would need to start saving your income. At the risk of sounding repetitive and clichéd, we will still advocate that “Expenses” should always be calculated as “Income - Savings”. An unfortunate trend today is that “Income - Debt - Expenses = Savings", and that is a sure way to a financial disaster.

Now once you begin saving your earnings, the next focus should be to set objectives for yourself. It’s quite similar to making an aspirational shopping list. Only that here you would be putting down more significant objectives like - building a retirement corpus, or planning to buy a home, or saving up for your child’s education. The point is to identify goals that you would need wealth to achieve. When you create wealth, you’re creating assets. Every little amount that you save or invest must have a reason, the reason to create an asset!

In fact, at this very moment, people across the world are working towards creating some asset, may be small, may be large, but an asset nevertheless! Ironically, some of us take asset creation so seriously that we loose our sleep, while some of us sleep over the need to create assets. However, assets are not created overnight. It takes planning, and focus, and a lot of patience to watch your savings actually transform into wealth.

Savings, Objectives and Patience should determine where you must invest to add an asset to your wish list, rather than your investment option determining how much you should save, what objective you can meet, and the time that you need to hold, which unfortunately is the case most often.

Majority of investors back-track their asset goal to suit their investment choice, rather than starting with their investment goal and then moving towards their best suited option. We should always work the other way around. E.g. If you want to create corpus for your retirement, you should look at the amount that you want as your nest egg (objective), where do your current investments stand (savings) and when do you actually want to retire (patience). Once you have these answers, you should then decide which investment option will suit your requirement the most.

Investors today are spoilt for choice with regards to investment options. Our needs and requirements will have to define which option suits us best. There is no real thumb rule or a-one-size-fits-all standard for allocating assets because we all are different and so are our savings, objectives and patience levels.

Now that we understand Assets lets dwell a little on how they can be created.

Assets can be created and maintained by investing in different avenues. The common options used for this are Equities (direct and indirect such as Mutual Fund), Debt, Property, Gold and Bank Deposits. Another interesting option is Art; though it will take some time to pick up in India.

During the Asset Creation stage, Equities should ideally have a reasonable proportion as they have a potential of generating high returns. However, equities bring these lucrative potential along with risk, which does average out over the long term. 

Never run your chariot with a single horse, always have more than one horse when you want to reach your destination. So, in case of any problem with one horse, your chariot will still reach its destination. Hence, even though your speed may get affected, you will still keep moving closer to your destination. That is why it is always advisable that you also consider Property, Debt and Bank Deposit, and Gold along with Equities.

Discipline is much required when creating or maintaining an asset.  It is discipline which will help us to think and sail through the difficult weather conditions. Discipline always pays!

Now, once you have added that asset to your wish list, and have reached your objective, it is time to start moving the asset into firmer ground to protect it.  Equities which were your driver in asset creation should take a back seat and options like debts, banks fixed deposits etc should be the right avenues to ride ahead. Move gradually out of equities; plan your move in advance so that you don’t end up in a scenario where your assets are dependent on market conditions. You have built your assets brick by brick, so cement your assets brick by brick too.

When you spend a major part of your day, a whole lot of your efforts and all of your strength to earn your money, it is difficult to watch your investments take wild swings every time the markets jump up and crash down. A proper allocation of your assets will make it possible to lower the amount of risk in your investments while still maintaining a decent return, which should help you create, maintain and enjoy your asset.

Authored by : Harshad Chetanwala, VP Sales, Quantum Mutual Fund.