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Should you never change your asset allocation?

Asset allocation however, is not set in stone. Neither should you keep changing it too often. What is the right balance? That depends on your financial objectives.

Your asset allocation is like a guide showing you which assets (equity, debt, real estate, gold etc) you hold and in what proportion. Knowing your asset allocation helps in determining the kind of risk you hold in your portfolio and the direction you want it to move, given your long- and short-term financial goals.

Asset allocation however, is not set in stone. Neither should you keep changing it too often. What is the right balance? That depends on your financial objectives.

Here are three valid reasons for you to change your choice of assets periodically, without making frequent adjustments.

If you have too many investments in real estate, that too can be an over exposure; although this is a long-term asset, it does not have good liquidity. Over exposure to real estate can be risky when you need to sell and can’t find any buyers. 

#1. Over exposure to one type 

How much you invest in one type of asset depends on what you want to achieve with that investment. Ideally, growth assets like equity are better suited for long term goals and stable return products like debt are better for short term goals. If most of your goals are long term goals where returns need to beat inflation and you have a 70% tilt to debt and gold, then you are over exposed to the wrong asset. 

Similarly, if your long-term goal is nearing completion – say a year away – and all your investments are still in equity, you are over exposed; both situations call for altering your asset allocation. 

If you have too many investments in real estate, that too can be an over exposure; although this is a long-term asset, it does not have good liquidity. Over exposure to real estate can be risky when you need to sell and can’t find any buyers. 

#2. Change in goals

You may have always envisaged retiring at 60-65 years of age and hence your investments got structured and allocated accordingly. If in the course of your professional life you decide to change track or retire sooner than expected, you will have to take a re-look at your asset allocation.

An earlier than expected retirement will necessitate an additional income flow for which you may potentially have to reduce allocation to growth assets and increase regular income giving investments. Similarly, the addition of children to your family will change direction and require an increase in allocation to growth assets, to be utilised say towards higher education needs. 

#3. External factors

In certain cases external factors can also play a role. During times of crisis, there could be risk return opportunities that are hard to ignore. For example, there have been brief periods where fixed income rates and returns were very close to long term equity return expectation. This meant, you could get a higher than expected return with lower risk. However, situations like this are usually transient and its difficult to attach the outcomes to your fixed goals. 

More often than not, your strategic asset allocation does not need to change. It should remain intact through market cycles and short-term volatility. Change is required only with significant changes in goals or over exposure to one type of asset. Take advantage of any transient change in external factors only with tactical allocation from surpluses rather than disturbing your fixed asset allocation. 

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