Asset Allocation-Importance in performance equation of your portfolio

How Asset Allocation plays an important role in the performance equation of your portfolio?

Each and every investor maintains a portfolio. But lot many of them don't know the importance that an asset allocation plays in the performance of their portfolio.

Generally portfolio is made up of Equity and debt related products.

But in your portfolio what should be the percentile allocated to the equity and to debt respectively plays a very important role in its performance.

There are basically 3 types of investors - Aggressive investor,Moderate investor and Conservative investor.

The asset allocation for all these different types of investors are different.

For investment a thumb rule can be followed which can be like:

1.Aggressive Investor - 100 minus his age can be invested in equity/equity linked products.
2.Conservative Investor - 80 minus his age can be invested in equity/equity linked products.
3.Moderate investor - Can invest somewhere in between aggressive and conservative investor.

Why there is need to re look and reallocate your assets?

The market goes up and down and the risk appetite of the investor may also change with time so it is always beneficial to re look and reallocate the assets in your portfolio.

Few basis can be considered for re balancing your portfolio:

1.Swings in the market:

If the market swings 25% in any direction(up/down)from your previous review time then that point can be considered as the point to review the portfolio.

2.Periodical review:

Depending upon market ups and downs there can be loss or profit in your portfolio,so it needs to be re looked every year.Like if the market is going up then the equity exposure may go up from lets say 70% to 75% ,so book your profits and shift those profits to debt market.This will help you in booking your profits in time and reducing the risk of loosing these profits in case of a fall.

3.Increase in age:

With the increase in age the risk appetite also changes. So portfolio needs to be re looked and rebalanced after every 3 years.

4.Financial Goals:

With the passing time the financial goals at that particular time are also to be kept in mind,like if money is required for higher education of your child then it needs to be taken care of.

Summary:

Bull Market:Whenever market goes up book your profits and shift these profits to debt market.

Bear Market:Whenever market goes down then shift profits of debt to equity.

Remember one thing that every bull market has a danger of fall and every bear market has an opportunity of investing at low levels.