Asset allocation is a powerful strategy that involves dividing your investments into different asset classes – like equities, bonds, real estate, gold and so on. Through this process of diversification, assets are combined in a way that provides your portfolio with both the possibility of growth over inflation and minimizing the risk. But asset allocation does not guarantee any absolute returns. In that sense the surety of your profits or the extent to which you are protected from losses, depends on how well you understand the risk and distribute your assets accordingly. So, to help you use the power of asset allocation effectively, here are a few points to ponder over:

1. Plot out your personal goals clearly:

The first thing you need to do is plot out your personal goals, with respect to where you are currently. This will give you clarity on which direction to move. Organising your personal goals will also help you understand your liquidity needs and risk tolerance at various stages of your life. Then, keeping in mind some of the more common goals like, buying a car or a house, starting a family, children’s education, etc.  and the liabilities associated with them, you can determine exactly how to distribute your assets to maximise the benefits you get from your portfolio. 

2. Understand your risk profile and determine the risk required:

A good financial plan includes a psychometric test to evaluate your willingness to take risk as an investor. This is known as your risk profile— it can help you take informed decisions while trying to meet plan for your goals. Apart from knowing your risk appetite, what is important is to know the risk that you are required to take for a goal and determining the willingness. Say, if you are an aggressive investor but your goal is coming in the next 2 years – you cannot think of investing in equities. Thus, it is important to have a balance between your willingness to take risk versus how much you can afford to take. 

4. Match right assets to your goal:

While determining your strategy for asset allocation, you will also have to think about how you can maximise your benefits in the short term as well as the long run. Choosing an investment option depends on your goal time frame and risk appetite. For goals coming within next 3 years, it makes sense to invest in stable asset classes which comprise of debt mutual funds, savings account, fixed deposits etc. For long term goals, growth assets comprising of equity and hybrid mutual funds, shares etc. can be looked at. What also needs to be kept in mind are the taxes, lock in (if any) and any exit loads associated with an asset.

5. Always remember to work with professionals:

Many people try to manage their finances on their own, and decide not to hire a financial advisor in a bid to save money. While it is possible, most people do not have adequate time and often end up inefficiently allocating and monitoring their assets. This could lead to unnecessary errors and may cost you more than working with a professional. So, it is better to consult a financial advisor or wealth management firm, who can help you plan for your investments and monitor it regularly.

6. Review and rebalance your portfolio

Last but not the least, it is important that you review and rebalance your portfolio over time, to account for any changes that may have occurred in the market or in regulation. A good financial plan is not static, but dynamic. A sound and systematic review process, to determine how your assets may need to be rebalanced over time, will definitely make a difference and allow you to harness the power of asset allocation. 

Different asset class move in different directions. Therefore, it becomes extremely difficult to predict which way any particular asset will be moving at a given point of time. But by keeping the above points in mind and harnessing the power of asset allocation, one will be able to generate better risk adjusted returns.