Which asset allocation is optimal?

Which asset allocation is optimal?

Which asset allocation is optimal?

The widely accepted and possibly most popular asset allocation, the 60-40 equity-debt ratio, seems to be fading. A hint of gold functions better.

We do not put all of our money into stocks, even though we are aware that they have the potential to outperform all other asset classes in the long term. This is due to three factors.

A: The most volatile asset type is equity, and not everyone can handle volatility.

Two: Not all of our objectives are long-term, even if this asset class could have the greatest long-term performance. We need money immediately; some of our objectives may take three to five years to accomplish, and we must have access to liquid funds in case of crises. So what happens if the stock markets are losing ground just when we most need our money?

Three: Diversification makes a difference. An increase in one asset class corresponds with an increase in another, making your portfolio more stable overall.

Thus, the following question emerges:

Which asset allocation is optimal?

Some calculations were run by Moneycontrol Personal Finance. For equities, we used the Nifty 500 Total Return Index (TRI), for fixed income returns, the Crisil Composite Bond Index, and for gold, the Nippon India ETF (exchange-traded fund) Gold BES. We plotted the year-to-date (YoY) performance and the three-, five-, and 10-year returns of seven distinct asset allocations from 2013 to 2023.

Asset Allocation #1 (most widely accepted and acknowledged worldwide)

60% equity

40% loan

Asset Allocation #2: Emphasizing Equity with a Hint of Gold

70% equity

20% loan

Gold: 10%

Third Asset Allocation: Equity-focused with a hint of gold

60% equity

30% loan

Gold: 10%

Balanced Allocation, or Asset Allocation #4

50% equity

40% loan

Gold: 10%

Balanced Allocation, or Asset Allocation #5,

50% equity

30% loan

Gold: 20 percent

Asset Allocation #6: Equitable Distribution

34% of equity

Credit: 33%

Gold: 33 percent

Asset Allocation #7: Fixed Income with a Hint of Equity and Gold

20% equity

60% loaned

Gold: 20 percent

five key items

Is it too late to be 60-40?

The most fundamental asset allocation, known as the 60:40 (equity-debt) ratio, has been in high demand for many years. And for years, it was effective. With the exception of 2016, when the stock markets did not perform well (the benchmark Nifty 500 index returned just 5% that year), it was one among the top performers every year from 2013 to 2017.

If you examine the asset allocation buckets' five-year results, you can see this tendency more clearly. Looking at the results from late 2015 to 2019, the 60-40 allocation did fairly well over a five-year period. The allure of 60-40 has faded after 2020.

A little gold goes a long way

You may increase the returns on your portfolio by include a little amount of gold—say, 10–20%. The 70-20-10 (stock, debt, and gold) combination is at the top of the charts because of the robust performance of equities in 2021 and 2023 and the gold bullishness in 2023. Since 2020, even the 50-30-20 combo has shown good performance.

From the end of 2020 to 2023, five-year returns were computed, and the combination of 70-20-10 has produced the highest returns.

The most unstable load is uniform.

The same weighted combination (34-33-33) is the most variable from year to year. When any one of its asset classes drops, this combination loses, with returns ranging from 1.8 percent in 2013 to 15.8 percent in 2023. It has produced consistent and respectable long-term returns. From 2013 to 2023, the average five-year return on this investment was 9.8%. Its long-term returns are among the lowest because of its passive nature, which allocates your money evenly across all asset classes regardless of what happens.

The distribution of assets is crucial.

Where should I invest right now? Take note that the Nifty 500 index has seen a significant decline after a number of years of strong performance. The Nifty 500 TRI returned 39.30 percent in 2014 but fell to 0.22 percent in 2015. In 2017, it yielded a 37.78 percent return; but, in 2018, it had a 2.13 percent fall. In 2023, the Nifty 500 TRI returned 27% of its investment. Anecdotal evidence suggests that, in order to diversify across asset classes and have a somewhat more balanced portfolio, it is now advisable to follow an asset allocation approach.

Avoid returns; the key is asset allocation

Is there a best way to allocate assets? The response is unequivocally negative. This is the reason.

The combination with the lowest equity (20-60-20) yielded a return of 12.3 percent in 2023. This goes well beyond a simple fixed deposit. The 20-60-20 option had the greatest return of all the combinations in 2018, during a period of declining stock markets (the S&P BSE Sensex returned 5.9 percent and the Nifty 500 TRI dropped 2.13 percent). That year, the lowest performance was 70-20-10.

Where should I put my money?

The ideal place to start for a medium-risk investor is with a 60-3 allocation, or 0-10 or 70-20-10. For improved diversity, those of you with a 60-40 allocation might also consider include a small amount of gold in your portfolio.

50-40-10 or 50-30-20 is a fantastic place to start if you're a cautious investor.