Last Updated on February 12, 2022 at 6:21 pm
Asset allocation refers to the proportion of different asset classes in a portfolio. For example, percentage allocation to equity and debt. The allocation is (or rather should be) decided with an aim to balance risk and reward. The adage, “do not put all your eggs in the same basket” is usually used to explain this strategy.
Determining the ‘right’ asset allocation for long-term goals (defined at least 10 years plus away) is a tough task if we are looking for a method to do it. It is difficult (if not impossible) to find the ‘optimum asset allocation’ either with a risk profiler or a portfolio analysis tool.
Ideally, one should choose assets which are little or even opposite correlation with each other (one does well when the other tanks). In such a case, it is easy to use a portfolio analysis tool to determine the ‘right’ asset allocation.
Equity, fixed income (debt) and gold is one standard combination which can be used for asset allocation.
🔥Secure your future with our Robo-advisory tool trusted by over 3,500 investors and advisors. From effortless retirement planning to funding your children’s biggest dreams, turn your financial goals into reality. 🔥
Subscribe for money management solutions via email! (Link takes you to our email sign-up form) Join 32,000+ readers in our community.
👉 New Tool Alert! NaviPlan: A Privacy-Focused Multi-asset Tracker and Goal Planner 👈
Personally I am not a fan of gold and will not choose it (too high risk for the long-term reward offered). So in this post, I will share some analysis with different equity:debt ratios.
Alok Jha has been asking me for an analysis with all three assets for a long time. So will do this in the next post.
I choose Franklin Indian Blue Chip as representative of equity and Franklin Indian Income fund as representative as debt. These are among the oldest equity and debt funds in the market.
We will consider a SIP from 6th July 1998 to 5th May 2014 (this was done a while back. Too lazy to update) in both funds.
This is how the XIRR will vary month by month
Can we now argue that since the XIRR of the equity SIP settles down after a while, we can have 100% equity exposure for long-term goals?
I certainly would not. If there is a ‘big crash’ close to when I need the money, I would be in trouble. I need the bed-rock of debt. How much of it do I need is unfortunately, a personal choice. Hard to provide a formula for it.
This is how the standard deviation (a measure of volatility) of the monthly XIRR looks for different equity allocations. The final XIRR is also plotted
Notice the bend in standard deviation at 10% equity allocation. It can be shown that it corresponds to the ‘optimum’ asset allocation in terms of risk vs. reward!
Hey we all want better returns, so let us take on more ‘risk’. But how much more is the question?!
Hard to give a mathematical answer.
I do not like a high double-digit standard deviation. I personally use 60% equity for my long-term goals and suggest no more than 70%. I think 50% equity is also a pretty decent allocation.
Recognise that we have considered a blue chip fund. Had we included mid and small caps, the volatility would have been much higher.
I think anything about 70% equity allocation will require a lot of maintenance (monitoring, tactical calls etc.)
I have better things to do. I want something that is low-maintenance, with reasonable risk and reasonable reward.
If my net equity portfolio gives me 1o-12% after 10Y+, I will be delighted. I would have met all my financial goals with reasonably low stress levels.
Use our Robo advisory tool to automatically determine the correct asset allocation for your goals and how to vary it in future (risk-reduction strategy).
We are on Google News
Use this button to add freefincal.com as a preferred personal finance source on Google News.
Explore 1,400+ videos on YouTube!
Subscribe to get posts via email!
Join 32,000+ readers and get free money management solutions delivered to your inbox! (Link takes you to our email sign-up form)Join our WhatsApp Channel
Explore our products
🔥Join our community of 9000+ users! 🔥- Use our Robo-advisory Tool to create a complete financial plan! More than 3,500 investors and advisors use this! Use the discount code robo25 for 20% off. Plan your retirement (early, normal, before, and after), plus non-recurring financial goals (such as child education) and recurring financial goals (such as holidays and appliance purchases). The tool helps anyone aged 18 to 80 plan for retirement, plus six non-recurring and four recurring financial goals, with a detailed cash flow summary.
- Our Flagship Course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,500 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market conditions! Watch the first lecture for free! One-time payment! No recurring fees! Lifelong access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
- Join the freefincal investor circle! An exclusive space for investors, advisors, fintech employees and students to access financial planning and insurance tools, mutual fund and stock analysis tools, coding strategies and Excel macros for data extraction. 750+ members are now part of our investor circle.
- Increase your income by getting people to pay for your skills! More than 900 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner seeking more clients through online visibility, or a salaried individual looking for side or passive income, we will show you how to do it by showcasing your skills and building a community that trusts and pays you. (Watch the 1st lecture for free). One-time payment! No recurring fees! Lifelong access to videos!
- Portfolio Tracker! Track your mutual funds and stock investments with our Google Sheet!
- We also publish monthly screeners for
Our Podcast: Let's Get Rich With Pattu
On Spotify: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! On Audible: Listen to the Let's Get Rich with Pattu Podcast
Listen to the Let's Get Rich With Pattu podcast on YouTube.
Now watch Let's Get Rich With Pattu தமிழில் (in Tamil)!About The Author
Dr M Pattabiraman giving a lecture
- Dr M. Pattabiraman (PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras.
- He has over 14 years of experience publishing news analysis, research and financial product development. He has over 28 years of teaching and research experience. He is also a public speaker and keynote presenter.
- He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free, AUM-independent investment advice.
- Connect with him via @pattufreefincal on X LinkedIn YouTube
- Pattabiraman has co-authored three print books.
This book helps you ask the right questions and find the right answers. It also includes nine online calculators to create custom solutions.
(2) Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want. 
Both the boy and girl versions of "Chinchu Gets a Superpower".
Most investor problems stem from a lack of poor decision-making. We made bad decisions and money mistakes when we started earning, and we spent years undoing them. Why should our children go through the same pain? What is this book about? As parents, what if we had to groom one ability in our children that matters not only for money management and investing but for every aspect of life? My answer: Sound decision-making. So, in this book, we meet Chinchu, who is about to turn 10. The story follows what he wants for his birthday and how his parents plan it, while also teaching him key ideas about decision-making and money management. What readers say! 
Feedback from a young reader after reading Chinchu Gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from a young age. The importance of money management and decision-making based on their wants and needs. Very nicely written in simple terms. - Arun.
About freefincal & its content policy
Freefincal is a News Media organisation dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact Information: To get in touch, please use our contact form. (Sponsored posts or paid collaborations will not be entertained.)Our publications
- Your Ultimate Guide to Travel. This is an in-depth exploration of vacation planning, including how to find affordable flights, budget accommodations, and practical travel tips. It also examines the benefits of travelling slowly, both financially and psychologically, with links to relevant web pages and guidance at every step. Get the PDF for Rs 300 (instant download)
- How to profit from content writing: Our ebook is for those interested in getting a side income via content writing. It is available at a 50% discount for Rs. 500 only!