You would have heard that diversification is important while investing money. For this diversification, asset allocation plays a crucial role. Asset allocation is key to ensuring that you are able to generate and maintain your wealth in the long run by minimising the volatility of a single asset class.
If you are trying to figure out the best way of asset allocation for long-term wealth preservation, you are at the right place! Let’s dive in to understand these techniques in this blog!
What is asset allocation?
In finance, asset allocation is simply spreading your investments across various financial securities, such as equities, fixed-income assets, bonds, precious metals, and more. Asset allocation planning helps you craft a diversified investment portfolio, which is important for investment risk management.
Every individual has different financial goals, so asset allocation varies from person to person. However, there is a checklist of parameters that you should keep in mind before you start your asset allocation planning:
- Financial goals
- Capital available for investment
- Risk tolerance
- Investment duration
- Investor’s age
Based on this, you can create your unique asset allocation that aligns with your goals and risk appetite.
Most assets’ values are not dependent upon each other, and often, they might move in different directions. This is the primary reason why asset allocation planning is crucial. Although you definitely have past trends and data to make data-driven decisions, there is no sure-shot way to estimate which asset classes will experience growth and which asset classes fail to be lucrative.
With asset allocation, you achieve portfolio optimization, which means an asset performing extremely well can compensate for the underperforming asset. In this manner, you can spread your risk while ensuring that your overall portfolio does well in the long run.
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How does asset allocation help in wealth preservation?
Let’s begin with an example. Imagine that you are able to purchase two chocolates with Rs. 100 today. Now, fast forward 10 years and maybe you can only buy one chocolate with the same Rs. 100. Here, did the amount of money change? No, but what changed is the value of money.
If your money is kept idle, it will slowly depreciate in value due to inflation. However, with asset allocation, you can ensure the preservation of capital by investing assets that beat inflation in the long run.
Through a long-term investment strategy, you can invest in different fixed-income asset classes with low correlation and balance the ups and downs of your overall portfolio.
Whether your goal is financial security planning for emergency situations or having sufficient funds for a comfortable post-retirement life, strategic asset management can help you.
Lastly, asset allocation for wealth preservation also helps ensure your investment stability in the long run. Hence, you do not have to worry about large capital losses as long as you curate a well-balanced portfolio.
Asset allocation for wealth preservation
Having covered the importance of asset allocation, it is time to look at instruments that can help you with long-term financial planning and also develop wealth preservation techniques.
Note that we assume that you already have exposure to the equity market via stocks and mutual funds. The below tools help you allocate your capital to different assets for diversification and to preserve wealth over time. How much you allocate to each of these assets depends on your goals and risk profile.
- Fixed-income securities for stability
Fixed-income securities are a class of securities that offer you a fixed amount of interest income on a timely basis. Since the returns are fixed, they are one of the most sought-after investment avenues for wealth preservation.
The most common fixed-income securities in the market are corporate and government bonds. The risk levels associated with these funds are low because even when the company issuing the bonds goes bankrupt, fixed-income holders are paid before the company’s shareholders, and hence, they enjoy higher priority.
- Gold as an alternative investment
From festivals to functions, gold ornaments are adorned everywhere in India, meaning the demand for gold will likely remain evergreen. However, it is not just the evergreen demand that makes gold such a lucrative investment. Gold is highly liquid, which means you can always sell it instantly.
Additionally, gold makes your portfolio less risky and maintains its value in the long run, making it a strategic wealth preservation technique! The best part is that there are many forms of gold investments, such as gold coins, jewellery, digital gold, and gold ETFs, that you can choose from!
- Index funds for passive income
Index funds are financial instruments that try to replicate the various market indexes such as Nifty 50, Sensex, etc. Index funds are passively managed by fund managers, and the fund composition is the same as the index it is imitating.
Therefore, the returns on index funds are similar to the underlying index. Due to the fact that they are passively managed, the costs of management are significantly lower, which can help you preserve your wealth and generate stable returns.
Lastly, index funds are already diversified and are a great choice if your risk tolerance is low!
- Real estate for capital appreciation
The primary reason why real estate is perfect for wealth preservation is its tangible nature. Real estate can easily bring a sense of security to you because of its physical presence.
Investment options like stocks are subject to market risk, company performance, and other factors. However, real estate value is governed only by a few factors. When you look at the past data, you will not be disappointed by how it contributed to wealth preservation and played a key role in sustainable wealth growth!
Apart from diversifying your investment portfolio, real estate can also help you generate regular income in the form of rent.
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With this, we come to the end of this blog. Remember that diversification is one of the main mottos of asset allocation, which leads to stable risk-adjusted returns. It is also a fantastic way to maximise returns and minimise risks.
However, before you begin your investment strategy, ensure that you have thoroughly evaluated your net capital available for investment and the risk you are willing to take because this ultimately helps you pick the right investment techniques and ensure wealth preservation in the long run! To know more about how to build wealth, subscribe to StockGro blogs!