Asset allocation is the process of spreading, or ‘diversifying’, your investments across a range of different asset classes and geographical regions. It is one of the most important factors determining the overall portfolio returns and it is still ignored by most of the retail investors in India.
Let’s now have a look on the common mistakes we all do which we need to avoid-
- Not a goal-based investment
Many investors who save and invest without knowing the exact reason of their investing. They invest in an undisciplined manner or say may be they invest because their friends are investing or invest because they see equity markets at high or they have excess funds and have no idea about where to deploy them and then evaluate options like FDs. Mutual funds etc.
Having no clear objective of investing might let you make wrong i9nvesting decisions. Therefore, if you have your financial goals and time horizon clearly defined, you can determine your optimal allocation.
- Under investing in desired assets
If you do not invest in right proportion in your desired asset classes then your portfolio shall possess sub-optimal returns. A common mistake done by most of the investors is that they allocate a sub-optimal portion on investment portfolio to equity. Investors need to take in consideration the inflation and taxes in their investment planning. Investors need to know that asset allocation is not just allocation between debt and equity but also includes asset classes such as real estate. Gold, cash etc.
- Short term focus
For most investors their important goals are long term in nature, they have preference for assured return products. This reflects short term focus which is long run could leave investors short of their financial goals. When investors prefer risk free high assured returns, they need to understand that there is no such thing assured returns in long term.
For instance, the risk free fixed return product in India were giving as high as 14-15% and now it quite impossible to find a risk free fixed return product higher than 9% pre-tax return.
- Unrealistic returns expectations
Another common mistake in asset allocation that leads investors compromising on their financial objectives. Lack of awareness is a root cause. If a stock price has doubled this year then that doesn’t mean the stock price would double the next year also. A few mutual funds gave 70% returns last year, but expecting the same the next year is unrealistic. Real estate is one such asset class that would lead you to make wrong investment decisions because of unrealistic expectations.
Therefore, you need to make a well researched investment decision with appropriate time horizon. To have an optimal asset allocation, you need to have realistic return expectations.
- Changing asset allocation too often
The basic tenets of investing in equity is buying low and selling high. But, retail investors often do the vice-versa. Investors usually sell their equity mutual funds or stop their SIPs in bear market. Whether you prevent further losses or wait for market to correct further, you need to know that it is almost impossible to time the market. Those who continue their SIPs in bear market and into the bull market create wealth.
Asset allocation comprises the right mix of debt, equity, gold, real estate and cash. One must ensure that they maintain the proper mix so that they can get consistent returns.
- Not changing asset allocation at all
If you change your asset allocation often is a mistake. You do not change your asset allocation at all is another mistake moreover when you are nearing your financial goals.
It is important that you shift your asset allocation to less risky assets when you are nearing your financial goals.
We have discussed some common asset allocation mistakes that all investors must avoid. But also you need to educate yourself about various factors impacting the returns of your assets. It is always good to seek guidance from a professional financial advisor to make sure that you are going forward towards achieving your goals.
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