India Fund Performance Compared to Index -Sensex(in %)
* move mouse over the graph to view data on any particular date.
[+-] Asset Allocation Chart

* Beta version, started on Jan/2010 as an trial. Currently contains very limited data. Read more about this chart in the post

Monday, February 15, 2010

Portfolio Asset Allocation

A critical part of investment decision is asset allocation, how you allocate the asset across different asset classes. It plays an extremely important role in your chances of succeeding in long term. In other words, it provides the the flexibility to act when market offers good opportunities to buy or sell investments.

If one had a significant % of his portfolio allocated in liquid assets including cash during the last crash, he would have had an opportunity to reallocate the portfolio to stock and other riskier asset at very attractive prices and there by higher the chance of appreciation of portfolio as a whole. Same way, if you had moved from riskier asset to safe assets before the crash, once would have saved lot of heart burn. On the other side, if you have significant % of your portfolio allocated in safe asset when market goes up, it limits your chances of gain. In other words, a good asset allocation is as important as picking the right stocks. Having all right stocks and a wrong asset allocation does not do much good.

As a side note, Buffet went into recession with $40+B in cash. He utilized significant portion of it in investments like Goldman Sachs, Wrigley, Burlington Northern along with other investments over last 2 years. This cash position was definitely an advantage for Buffet and he utilized the cash position during downfall to his advantage. Another reason for Buffet''s general high cash holding is Berkshire's huge insurance operations.

Having a right asset allocation strategy is easier said than done.

I am trying to improve in this area, and still looking at many options, one of the things I am trying is to develop an asset allocation correlated to index P/E (aka. Indexometer). While not a fool proof method, what it means is to allocate more towards liquid assets as the index PE goes up and move towards more riskier assets when P/E is low. Again, this is not an automated process or a rule, but more of a guide (among other things) for asset allocation. Also, I don't plan to sell all of my stocks as index PE goes up, rather try to adjust exposure accordingly. I must add that the strategy helped in the recent fall (at least, to till this moment). I had high cash component going into last month's fall compared to previous times. One time is not enough to call it a rule, but planning to track it closely to see if it really works over time.

In order to add more visibility to the process, as a Beta (trial) version, I am adding a new chart (on page top, click on the link "[+-] Asset Allocation Chart") which displays the percentage of liquid asset in my total portfolio at a given time. In the graph, this % is compared to corresponding index PE along with index and fund performance. So, over time I am hoping to see a positive corelation between cash/liquid asset and index PE (As index pe goes up, cash component in portfolio also should go up, and vice versa)). I am still working on the best way to display it, but going to start it to see how it works out. If you have any suggestions about how to display this information in a better way, please let me know. My objective is to display the allocation of liquid asset in the portfolio and compare it to index.

Note: I have scaled the index and fund numbers proportionately to cash position range, so that graph looks more meaningful. In this particular graph, I am not comparing the performance of the index or my fund (we already have a graph for it). Key elements in the graph are the cash and liquid asset % (which is approximately 100% - stocks allocation).


buzzingstreet said...

Dear Visitor,
Thanks for visiting this nice and useful blog. As many events are about to happen soon. So we just want to share few things with all visitors as it might be helpful for everyone.

NSE and BSE are trading in range and we are expecting breakout in the market after budget. One should buy quality stocks at every decline and should exit long positions at every rise.



indian share market NSE BSE likely to trade in a range for some time, Nifty range being 4700 on the bearside and 5400 on the upside, The Eurozone issue is not over and market may see big FII selling that can lead to a meltdown, he feels. So buy below Nifty 5000 and book out above 5300,
by nse share tips