Even as times change, certain fundamentals remain constant. One of these is the foundation or rationale for your portfolio allocation.
Market dynamics fluctuate as times change, new investment opportunities emerge, and you may gain new insights. The importance of asset allocation, on the other hand, has never waned. Why?
Markets are volatile, and no one knows how much equity or gold will rise or fall over the next year or so.
However, based on the investment asset’s previous behavior pattern, a broad understanding of how much return can be expected over a reasonable investment horizon and the level of risk involved in achieving that aim can be gained.
The current market situation
What you’ve just read isn’t brand new information. So, what’s the point of repeating? The reason for this is that at this time, several investors are attempting to evaluate the present market level, with the implications of allocating their portfolios by that judgment.
The following are some of the most prevalent refrains:
- Because equity markets have outperformed fundamentals and valuation levels are not cheap, equities allocation should be reduced.
- Why invest in debt / fixed income when interest rates and accruing levels are so low, and total returns net of inflation are negative?
- Because gold prices have fallen, there is no need to invest in it until there are signs that they will rise again.
These arguments could be right, but that doesn’t matter. These aren’t the criteria for allocating your portfolio in the first place.
Portfolio Allocation
The reasonable response is that the past performance of equity, debt, gold, or any other investment asset tells us roughly how much could be expected over a reasonable holding period.
Let’s take a look at it from a different angle. When you invest at a given market level, such as equity at a certain valuation with current P/E above historical average or fixed income at a certain interest rate level, it has a long-term impact on your returns.
However, in the long run, the asset’s market dynamics take control. As a result, you may afford to overlook the entry-level issue if you have a sufficiently long horizon.
Even if you enter the market at a favorable time, an unfavorable occurrence may occur shortly, reducing your returns. Markets tend to calm down and find their level over time.
There is an innate as well as an apparent purpose for doing anything. You must clear your mind and determine what is motivating your investment decisions.
Chasing a certain target price is only worthwhile if you are familiar with the asset and have a good understanding of market dynamics. Otherwise, stick to a portfolio strategy that includes sufficient diversification and is tailored to your investing goals.
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