Asset Allocation – That is what investors should focus on now; above all else

In recent months, Korean stock markets have been on an amazing bull run. Retail investors are selling their homes and other assets to invest in equities. This type of frenzy is quite common in India too. That is exactly what needs to change!

How to handle this market volatility?

The last few months have been trying for Indian investors. It was a mix of factors. Firstly, the war in the Middle East led to a spike in the price of oil and oil-driven inputs. Secondly, FPIs had been on a selling spree since September 2024 and it only accentuated in recent months. For FPIs, it was the cheaper valuations of other EMs, plus the fact that India had few listed companies in the AI matrix. The third big factor leading to market volatility was the vertical fall in the rupee. The rupee falling to as low as ₹96.97/$ had drained bulk of the gains that FPIs had made on Indian stocks, triggering further selling.

The problem is not the problem

Remember the famous lines of Captain Jack Sparrow in Pirates of the Caribbean, “The problem is not the problem; the problem is your attitude about the problem.” Today most investors believe that the volatility is the problem. However, the real problem is that most investors have put money in equities without factoring in the risk of volatility, which is inherent to equities. It is said that nearly 85-90% of your returns are determined by asset allocation. When you chase asset classes like equities or gold or silver or global assets; you are ignoring asset allocation. That means; you are missing out 85-90% of the returns. Then it is hardly surprising that people are losing money in the markets.

Focus on asset classes and asset allocation

When you shift your focus from chasing hot asset classes to allocating funds to asset classes, your entire approach changes. You are no longer trying to outrun the market, but are instead allowing the vagaries of the market to play to your benefit. Asset allocation is about identifying your asset class mix and then sticking to it with some flexibility. It has been empirically proven that a proper asset allocation, not only captures the best of market returns, but also offers better risk-adjusted returns. When you chase fads, remember that someone has already whipped off the cream from the top. Instead, you just need to tweak your strategy and focus on your asset allocation.

Asset allocation works because it is about discipline

In the stock markets, the things that really work are process, discipline, and persistence. Asset allocation combines all these 3 attributes. It is a process because it is based on the return potential of assets, your goals, and your own risk capacity. Asset allocation is about discipline because it has to be followed with diligence, even if it sounds very boring. Thirdly, asset allocation is about persistence because you need to persist with your plan for the long term. A well-crafted asset allocation not only feeds you outperformers in all type of markets, but also offers better risk-adjusted returns. Next time around, don’t blame market volatility. It is smarter to just focus on asset allocation.