How to Diversify Your Portfolio through Proper Asset Allocation

To earn greater profits, millennials should avoid making emotion-driven decisions about buying or selling holdings
How to Diversify Your Portfolio through Proper Asset Allocation
How to Diversify Your Portfolio through Proper Asset Allocation

With thousands of stocks, bonds, and mutual funds to choose from, picking the right investments can confuse even the well-read investor. So what is the best thing to do? Instead of stock picking, you should start by deciding what mix of stocks, bonds, and mutual funds you want to hold. This is known as your asset allocation. The growing craze amongst Indian millennials for investments in the US Markets has taken the industry by surprise. Young and cautious, this generation of investors has been known for their extensive research, careful planning, and appetite for moderate to low-risk investments. From buying assets like cars, real estate to taking vacations, millennials have always preferred rentals over ownership. Investments in the intimidating global markets were not favoured, until Covid happened. Young and novice investors have taken to US markets to manage their finances and expenses amid salary cuts and job losses.

According to the experts, most individuals belonging to this set of investors tend to latch on to one company instead of building a portfolio that helps them divide risks while choosing the sector of their choice in their basket of securities. Social media, opinions of their family members and friends often become a source of their research; making them take fad-based decisions. Moreover, millennials, just like all other investors, tend to make emotionally driven decisions when buying or selling the holdings that cause them to tap very little to no benefit of the growing markets.

So how should youngsters go about investing in the global markets,especially during the ever-so-disruptive state of the markets? Well, the biggest key here is finding the correct asset allocation. Asset allocation is the discipline that every investor needs to inculcate to avoid the recency bias. Asset allocation must be according to the current market environment and not just be based on past performances of a particular asset class as stocks are subject to continuous change and one cannot determine if a particular basket of securities will be the winner every year. Once an individual has determined a raw structure of the asset allocation he would like to go for, the next step would be to pick an asset class according to his risk personality. As individuals, our ability to absorb the same amount of risks differs from one person to another. Every individual must opt for a portfolio that is a perfect fit for his career, age, and family structure. Experts say that “92 per cent of all returns come from right asset allocation while 8 per cent comes from luck and taking the right decisions at the right time in the market.”

But the millennials don’t need to worry about knowing which companies are performing the best, as they are already following them and tracking their business in real-time. Pet care, automobiles, video-conferencing platforms, gaming software, and e-commerce companies are the top preferences of millennial investors. These sectors received a huge amount of interest due to the nationwide lockdown where people had to depend on touch-free solutions for their day-to-day activities while sitting at the comfort of their homes.

The only skill that remains to be acquired is the need for careful and strategic decision- making during the highs and lows of the portfolio. Since millennial investors trade mainly to acquire gains and create assets, their choice of the portfolio will undoubtedly differ from the High Net-worth Individuals (HNI) who invest to add on to their wealth. Millennials must create a portfolio with long term superior risk-adjusted returns to save for their future expenses and life goals. The key takeaway to investing in a pandemic is to hold on to your asset allocation and avoid emotion-based decisions. The decision to buy or sell your stocks during the pandemic must depend on the asset framework and not market fluctuations. One must seek an opportunity in every adversity and use the pandemic to build a strong portfolio.

The author is Co-founder, Stockal Inc.

 DISCLAIMER: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.

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