Why you need to rethink Asset allocation

Once you have made your mind to start your investment journey, the very first decision an investor has to make is about asset allocation. Every financial asset can be broadly classified into one of these two groups, Equity or Bonds. Asset allocation means deciding what percentage of investment should be in stocks vs bonds?

Historically over long periods, equities have almost always outperformed bonds. Now you might be thinking, why not fully into equities then?

Equities are more volatile its price fluctuates in shorter duration but over a long duration it tends to go up. Assume a case your whole investment capital is in equity and you want to liquidate it. It might be the case that the time is not opportunistic. Dividing investment into equities & bonds will give you mental peace and an alternative source of fund if you need to liquidate your investment when equities are down.

Coming to the part what should be the equity/bond distribution. There is no one answer to it, it depends on lot of factors including your investment objective, income requirements, risk tolerance, financial situation, age.

Benjamin Graham suggests a ratio of 50/50 in his book The Intelligent Investor,

John C Bogle suggests 70/30 to 60/40 equity/bond portfolio.

In your investment journey you will have two phases, phase one (Accumulation phase) when you start investing money phase two (Distribution phase) when you start redeeming money. When you are in Phase one and you have extra cash, you can have more exposure into equity and as you move towards phase two you can gradually adjust equity/bond ratio on an annual or bi-annual basis.

You can either take above mentioned ratio or come up with your own ratio, anything is good as long as you align it with your objective.

Let me know in comments what’s your asset allocation strategy.