One of the biggest problems new investors face is placing all their eggs into one basket or stock, hoping to get rich quickly. What often happens is that new investors “blow up” their portfolio and stay out of the market for years. If you want to learn how to make money in the stock market, then you need to understand asset allocation.
So what is asset allocation? Asset allocation is simply investing portions of your investable money in a diversified set of investments. Here’s why proper asset allocation protects your portfolio and helps keep you invested.
While asset allocation is a key component of our tactical factor allocation portfolios, we have recently launched a simple small portfolio made of ETFs that follows the principals of tactical asset allocation.
Balanced - Multi Factor Tactical smallcase by Wright Research
Allows for diversification
With asset allocation, you can make sure that your investment portfolio is properly diversified. You want to make sure that your investment money is not concentrated in one or two stocks in one or two sectors. Ideally, you want assets to be diversified in non-correlated assets.
Our tactical ETF portfolio allocates to a diverse set of broad market indices:
- Equity: Nifty, Bank Nifty, Infra Index ETFs
- Bonds: Government Securities, Liquid ETFs
- Commodity: Gold ETF
- International: Nasdaq ETF
Smoothness in rate of return
It can be scary to deal with a portfolio that can lose 10% in a month. When you are properly diversified, with the right asset allocation, you can experience less volatility in your portfolio. This will reduce your chances of panic selling.
In fact, our tactical ETFs portfolio backtest shows a much smoother returns profile that the benchmark index, as seen from the graphs below.
Minimizes the maximum drawdown
The maximum drawdown is the biggest loss that your portfolio will experience. With asset allocation, your maximum drawdown will be lower than simply putting all of your money in one or two investments.
With your money in just a couple of investments, your portfolio could experience a maximum drawdown of 50% or more. Could you sleep at night seeing half of your money gone from your portfolio? Proper asset allocation can reduce your maximum drawdown.
Our tactical ETFs portfolio gave a <10% drawdown, when the equity markets went down 40% in March'20
Provides exposures to bull markets
There is a saying, “There is always a bull market out there somewhere.” When you practice proper asset allocation, you increase your chances of exposing your money to a bull market.
For example, if you own Indian stocks, international stocks, gold, silver, and long bonds, there is a chance that there will be a bull market in at least one of those assets. This gives you a great chance in always participating in a bull market.
Protects against market crashes, bear markets and corrections
The India Stock Market has experienced three major crashes in the last 21 years: The 2000 tech crash, the 2008 financial crash and the 2020 COVID crash. With proper asset allocation, you will have a portfolio of your portfolio outside of stocks. This can prevent you from experiencing big unrealized losses on your portfolio.
View our tactical asset allocation portfolios
Want to master asset allocation? Consider investing in the Wright Research Tactical Asset Allocation family of portfolios. We have done the research and have created balanced portfolios designed to survive and thrive in almost any market conditions.