‘Don’t keep all eggs in one basket’ – this common proverb can be applied to many aspects of life, but perhaps is most relevant for your personal investments. When you are investing, you have choices – choice to make an investment in various asset classes – equity, debt, real estate, precious metals and others. As an investor, our goal is to have an asset allocation strategy (with investments in different asset classes), according to our age, risk appetite, financial goals, investment horizon etc.
Each asset class has distinct characteristics which make them suitable for different types of investors with varied goals. It is important that you understand the risk inherent in each of these asset classes, and invest according to your own risk appetite.
To understand assets from the investing point of view, it is important to know:
a. The business cycles
b. The correlation among different asset classes
Every asset class broadly follows a period of growth or expansion followed by a phase of contraction making one full business cycle. While there is no strict rule of what a business cycle tenure should be for an asset class, broadly the change in prices of an asset class would give us an idea of the business cycle it is going through – either expansion or contraction.
Business cycles for each asset class varies. For example broadly – equities and precious metals have totally contrasting business cycles. Precious metals like gold/silver tend to do well when equities are not performing and vice versa. This comparison of price behavior of asset classes is determined by correlation. Generally it is advised to opt for negatively correlated asset classes – i.e. asset classes with opposite business cycles – like precious metals and equities – to cushion your portfolio returns from contraction in business cycles.
A question we are often asked is that if I have a good understanding of my asset allocation, is there a need to review? As an advisor, our answer to this is a “Yes”. Asset allocation should also change, depending upon the evolving and changing phases of your life, your risk appetite and your duration of the goal, coupled with the business cycle in which a particular asset class is going through.
We have simplified this for you in our investment advisory journey. For the different investment personas, we have created, we start our recommendation with a view on what asset allocation is best for our customer at present. In our approach, post understanding of investor persona, we recommend an asset class bifurcation suitable to each consumer’s profile, followed by investment options within each asset class commensurate with the personas.