The most important question an investor faces is what proportion of his money should be in Equity/Debt/Gold/Other assets.

A thread of Strategic Asset Allocation:πŸ§΅πŸ‘‡
Instead of going into a lot of theory, Let's start with an example:

Suppose we have Mr. A as an investor who wants to do an asset allocation. He decides that he wants to have 50% of his corpus in equity, 30% in debt, and 20% in gold.
Also, he will be rebalancing his portfolio on a yearly basis to achieve the target asset allocation.

Hence, now we have a ratio of asset allocation i.e. 50:30:20 for Equity:Debt:Gold.
Mr. A starts with a corpus of Rs. 10,00,000, Hence, his allocation will be Rs. 5,00,000 (Equity) : Rs. 3,00,000 (Debt) : Rs. 2,00,000 (Gold) with rebalacing period of 1 year.

Rebalance date: 1
The portfolio value on the rebalancing date is Rs. 11,30,000. See the below image:
We can see that Equity portion of portfolio has done well & is higher than targetted allocation. We will have to rebalance the portfolio now in its original ratio.

This is done by selling the Equity portfolio and investing in Debt & Gold to make the allocation right.
Rebalance date: 2

Let's move to the next rebalance date, In the image here, we can see equity has again become a bigger allocation due to growth. So we have to again rebalance it to our original allocation & to do that, we will have to sell more equity & shift to Debt & Gold.
Rebalance date: 3

On this rebalance date, We can see that equity has underperformed & the proportion has gone below our target allocation i.e. 50%.

Hence, We will now sell Debt & Gold to rebalance the portfolio and invest more in equity to achieve our target allocation.
From the above examples, it can be seen that asset allocation can be managed by an investor to stay disciplined. The examples are quite basic just to make the understanding clear. Also, there can be more asset classes in the portfolio but the rebalancing method will be the same.
Let us now understand the Pros & Cons of Strategic Asset Allocation

Pros:

- Periodic rebalancing ensures that money moves to the asset class that has underperformed & will deliver better returns once it picks up.
Eg: If the equities have been underperforming then your debt exposure will slowly move to equities at lower levels & when they finally start to perform, you will have better returns on the portfolio.

- It ensures you are not over-exposed to any single asset class.
Cons:

- In the case of the rising equity market. It may keep rising & your exposure will keep shifting to debt & hence you might be deprived of higher gains.

- Rebalancing can be a costly exercise due to taxation impact & exit loads.
Conclusion:

A better approach could be to keep investing in the pre-decided proportion & rebalance only when there is a Euphoria-like situation or when there is any interest rate risk rather than periodic rebalancing.
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