Life, like markets, is constantly changing. From an individual investor’s perspective, there are two things happening in tandem. First, the investor’s personal circumstances keep changing with changes in risk profile, income and return expectations. Second, the economic landscape also continues to change, impacting investment returns across all asset classes. So what are investors doing to track these changes and perhaps even take advantage of these moves as opportunities to make great investments. As all roads lead to Rome, all solutions for good investment experiences lead to diversification through optimal asset allocation.
Asset allocation involves investing your portfolio in multiple asset classes so that sharp negative movements in one asset class do not have a disproportionate impact on your overall portfolio. However, it is important to understand that asset allocation is not as simple as dividing your investments between debt products and equities. Increasingly, the correlation between debt and equities is getting stronger, so investors who only invest in pure debt and equity products cannot reap the true benefits of diversification through an allocation. of optimal assets.
Here’s how you can create a well-diversified long-term investment portfolio.
Static vs Dynamic Asset Allocation: If your personal situation and the investment environment change, why should your asset allocation strategy remain the same? Thus, you must adopt a dynamic asset allocation strategy so that your portfolio can easily adapt to the changing contours of the external and internal environment. This means that instead of having fixed or static allocations, you need to change your asset allocations in response to your changing circumstances and the changing investment environment.
Exposure to precious commodities like gold and silver: Historically, precious metals like gold and silver have had very low to negative values with equity and debt investments. Gold has several attributes that make it a compelling investment choice for any investor. These include its value as a diversifier, its potential to generate strong long-term returns, and its ability to act as a hedge in volatile economic scenarios. Silver has similar qualities in addition to the fact that it is widely used as an industrial commodity and can therefore benefit significantly from an economic recovery. Also, right now you don’t need to buy the physical product to get exposure. You can simply invest in a silver or gold Exchange Traded Fund (ETF) that will give you the exposure you want without having to own the physical commodity.
Dynamic debt duration management: Another thing about achieving optimal asset allocation is ensuring diversification across asset classes. This means that it is not enough to simply divide your investments between debt and equity. Even within these asset classes, you should strive for some level of diversification. For your debt exposure, you might consider investing in a dynamic debt duration fund. These funds dynamically manage duration based on the interest rate cycle. For example, in case the interest rate cycle is in an uptrend, these funds tend to have a shorter duration and when the interest rate cycle is in a downtrend, the average duration of the fund increases.
Exposure to Mutual Funds (MF) and Funds of Funds (FoF): One of the key principles of asset allocation is to diversify portfolio investments across multiple instruments, themes, sectors and even markets. As an individual investor, you may find it difficult to select, invest and monitor such a wide range of investments. Thus, you should definitely consider taking advantage of MFs and FoFs to diversify your investment portfolio. These are vehicles that pool investors’ money and then invest it in asset classes, themes and markets in accordance with the program’s mandate. A FoF goes one step further by investing in multiple other funds, giving you diversification benefits from a single investment.
Over the long term, optimal asset allocation can ensure that your investment portfolio is well protected against volatility. It helps you control your emotions and make sound investment decisions in a disciplined and value-creating manner. However, always remember that asset allocation is not just about dividing your investment between debt and equity. All of these points can put you on the path to creating a well-diversified and solid long-term portfolio.