Less risk is better when it comes to investing.

The Importance of Having a Long-Term Asset Allocation Plan

The Importance of Having a Long-Term Asset Allocation Plan

When it comes to investing and saving for retirement, it is important to look at from a long term perspective. Don’t get carried away by short term noises in the market. Yes, you might make a quick 20% to 30% returns on investments. But unless you have a decent allocation on it, it is not going to make much difference in your long term return targets. For example if you allocate 1% of your assets into a hot stock and it goes up by 30%, you will only get 0.3% (1% x 30%) returns on an overall portfolio basis. So the morale of the story is that not only you have to make the right investment choice, you also have to get correct asset allocation to start with.

So what is the correct asset allocation? Well there is no definitive answers and it depends on your risk and returns expectations and which stage of the life cycle you are in. Typically, for a moderate investor, it will be 60% to 70% in bonds and 30% to 40% in equities simplistically speaking.

Let’s take a closer look at long term equity returns and which are the preferred sectors.  The table below (source: Morningstar) shows that the growth stocks have outperformed the value stocks in US over the last 15 years. And the small caps have outperformed the larger caps over the same period. Another interesting observation is that the small cap value actually outperformed large cap growth over the last 15 years.

On a global level, India was the best performing country in the last 15 years and followed by Latin America. Both have outperformed US. Granted that historical returns may not be good indictors for future returns. But these data do give you some food for thought regarding country allocation and investment style allocation between values and growth.

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