If you are investing in equity for the long term, does it make sense to practise asset allocation? This video delves deep into this aspect. But what is asset allocation? Asset allocation is dividing assets across different assets such as equity and debt. It helps limit portfolio volatility. But is it useful for someone who has a longterm horizon?

In this analysis, we have compared a pure equity portfolio with various assetallocation strategies: 70:30, 80:20 and 60:40. If we see the final amounts in each of the cases, the pure equity portfolio has turned out to be most rewarding. However, this is not to suggest that asset allocation is not useful for longterm investors.

To understand the efficacy of asset allocation, we studied the maximum drawdowns from these portfolios across market falls. The assetallocation portfolios fall less than pure equity portfolios. During the 2020 market crash, they performed much better than the pure equity portfolio.

While asset allocation may give lower returns in the end, its main use is in containing the downside in the portfolio. An abrupt fall can cause many investors to sell out prematurely. Even seasoned investors aren’t immune to this behaviour amid market crashes. So, asset allocation ensures that one stays put through tough times. Given this, the small loss of returns shouldn’t be a problem.

Asset allocation also takes care of the dilemma of when to book profits and when to invest more. Its close cousin is rebalancing. Rebalancing means restoring the desired asset allocation periodically. So, if equity has run up, part of the equity portfolio can be sold to restore asset allocation. This can take care of profitbooking as well. Similarly, if the debt part has gained more in the portfolio, part of it can be sold to restore the desired asset allocation. Doing so will ensure that you buy more of equity when the markets are down.

Hence, whether you are a new investor or someone with a couple of years of experience or a seasoned investor, asset allocation is useful for you.

Chapters

00:00 Introduction
01:53 Pure Equity Portfolio vs 7030 Portfolio
04:51 Pure Equity Portfolio vs 8020 Portfolio
06:00 Pure Equity Portfolio vs 6040 Portfolio
07:28 Evaluating Asset Allocation and Rebalancing

Link to the video data: https://docs.google.com/spreadsheets/...

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