Investment : Asset allocation will not work for the next 10 years..! - MYREALITY.In, Real Estate, Share Market, Mutual Fund, Insurance
Trending
Powered by Blogger.
Sunday, March 06, 2016

Investment : Asset allocation will not work for the next 10 years..!

Asset Allocation - Is it Important for Long Term Goals?

by Mr. B. Padmanaban, CFPCM
Certified Financial Planner, Chennai

After 2008 share market crash, Asset Allocation is the widely used word across investment community.

Whether we believe asset allocation will help in the long run or not, if you are saying that I will not do asset allocation then you will be considered as TABOO (A social or / religious custom prohibiting or / restricting a particular practice). It is more of forced belief than it is existed ever before!

My belief and all the data point always suggests that in the long term 100% equity will deliver better return than the asset allocation, probably asset allocation reduces the volatility in the portfolio and one needs to do the balancing religiously year on year, after sticking on to one particular asset allocation percentage which is easier to be said than to be done when we manage more clients in the future...
 
B. Padmanaban, CFPCM


The below table suggests how the returns varies if you keep changing your asset allocation percentage. 

I have provided the excel sheet as attachment to change your asset allocation and see the returns. 

In the above table mere 2.5% CAGR generates 279 times against 132 times which is lot of money.

Investment
1,00,000




Returns
Multiples
Sensex
60%
Gold
30%
FD
10%
14.09%
115
Sensex
70%
Gold
15%
FD
15%
14.27%
121
Sensex
70%
Gold
20%
FD
10%
14.37%
125
Sensex
80%
Gold
10%
FD
10%
14.52%
132
Sensex
100%
Gold
0%
FD
0%
16.94%
279

I just went ahead one more step and see how long the impact will be in your portfolio. To my surprise it is existed for the first year only (as per Sensex from the beginning) after that equity takes control, at the end of the day returns are concerned 100% equity always outperform. But, at the same time if you start in a bear market or volatile market it takes some more year to come to break even than the 100% equity to take a grip.

S. No
Year
Sensex
FD
GOLD
100000




70%
10%
20%

Asset Allocation
Sensex
1
1979-80
29%
7.00%
46%
30.20%
130200
129000
2
1980-81
34%
7.50%
31%
30.75%
170237
172860
3
1981-82
26%
8.00%
13%
21.60%
207008
217804
4
1982-83
-3%
8.00%
0%
-1.28%
204358
211269
5
1983-84
16%
8.00%
8%
13.60%
232151
245073
6
1984-85
44%
8.00%
7%
33.00%
308760
352905
7
1985-86
62%
8.50%
7%
45.65%
449709
571705
8
1986-87
-11%
8.50%
9%
-5.05%
426999
508818
9
1987-88
-22%
9.00%
33%
-7.90%
393266
396878
10
1988-89
79%
9.00%
3%
56.80%
616641
710411
11
1989-90
9%
9.00%
2%
7.60%
663506
774348
12
1990-91
50%
9.00%
7%
37.30%
910994
1161523
13
1991-92
267%
12.00%
25%
193.10%
2670122
4262788
14
1992-93
-47%
11.00%
-5%
-32.80%
1794322
2259278
15
1993-94
66%
10.00%
10%
49.20%
2677129
3750401
16
1994-95
-14%
11.00%
3%
-8.10%
2460281
3225345
17
1995-96
3%
12.00%
6%
4.50%
2570994
3322105
18
1996-97
0%
11.00%
2%
1.50%
2609559
3322105
19
1997-98
16%
10.50%
-14%
9.45%
2856162
3853642
20
1998-99
-4%
9.00%
-2%
-2.30%
2790470
3699496
21
1999-00
34%
8.50%
3%
25.25%
3495064
4957325
22
2000-01
-28%
8.50%
2%
-18.35%
2853720
3569274
23
2001-02
-4%
7.50%
2%
-1.65%
2806634
3426503
24
2002-03
-12%
4.25%
16%
-4.78%
2672617
3015323
25
2003-04
83%
4.00%
7%
-8.67%
2440901
5518041
26
2004-05
16%
5.25%
7%
13.13%
2761269
6400927
27
2005-06
74%
6.00%
12%
54.80%
4274445
11137613
28
2006-07
16%
7.50%
34%
18.75%
5075903
12919631
29
2007-08
20%
8.25%
8%
16.43%
5909620
15503557
30
2008-09
-38%
8.00%
29%
-20.00%
4727696
9612206
31
2009-10
81%
6.00%
22%
61.70%
7644684
17398092
32
2010-11
11%
8.25%
22%
12.93%
8632760
19311882
33
2011-12
-11%
9.25%
34%
0.03%
8634918
17187575
34
2012-13
8%
8.75%
17%
9.88%
9487616
18562581
35
2013-14
19%
8.75%
-3%
13.58%
10775560
22089472
36
2014-15
25%
8.75%
-9%
16.58%
12561609
27611840


16.94%



14.37%


Based on the past data and the current market scenario many can believe that today we are still in a structural bull market. In a structural bull market, the result will be exactly similar to what we have seen in the table. 

Asset allocation will not work for the next 10 years, I mean it will generate much lesser and the volatility will get absorbed by equity in a year or two. When the risks are equal and mitigated in the initial year itself we should look for superior returns.

I have taken 3 balanced funds for a simple reason these funds are considered to be relatively conservative than the other balanced funds and I have the data for the last 15 years.

Total Return % 
(03/03/2016)
1-
Month
3-
Month
YTD
1-
Year
3-
Year
5-
Year
10-
Year
15-
Year
Tata Balanced
Fund
-0.9
-5.46
-6.64
-9.34
18.69
14.79
14.15
18.24
ICICI Prudential Balanced
1
-5.51
-5.78
-8.73
16.54
14.33
11.54
16.14
HDFC       Balanced Fund
0.54
-5.89
-6.46
-8.44
18.3
13.95
13.98
16.78
S&P BSE Sensex
1.58
-4.94
-5.78
-16.85
9.13
5.88
8.78
    12.75%

Still if you feel that asset allocation is the way, instead of you doing it, leave it to the fund manager who is managing balanced fund (switching the debt & equity based on the market) and generated far superior return than one stick on to any particular asset allocation percentage.

Our equity market is inefficient for at least another decade and actively managed fund will generate a superior return than the passive funds. It was proved for the last 20 years and it will be for the next 10 years at least.

I am not here to force you to buy my argument, just look at the practical data and take your own stand rather than forced belief that it is always good.
Hope this helps...

B. Padmanaban, CFPCM
Certified Financial Planner
9884349173

Investment : Asset allocation will not work for the next 10 years..! Reviewed by S. Chitra on March 06, 2016 Rating: 5 Asset Allocation - Is it Important for Long Term Goals? by Mr. B. Padmanaban, CFP CM Certified Financial Planner, Chennai After 20...

No comments:

Google+ Followers

ValarThozhil - November 2017