Everyone talks about Asset Allocation. But no one tells you how to choose one.

Here is a thread on how to do it 👇
Reduce No of Decisions: Don't overcomplicate by debating 60% vs 62% vs 65%

Simplify into 5 levels

Risk Level 1: 10% Equity: 90% Debt
Risk Level 2: 30% Equity: 70% Debt
Risk Level 3: 50% Equity: 50% Debt
Risk Level 4: 70% Equity: 30% Debt
Risk Level 5: 90% Equity: 10% Debt
70% Equity: 30% Debt - in the long term, if rebalanced back to original allocation every year (for +/- 5% deviation), provides a return close to 100% Equity.

So, go beyond 70% equity allocation only if - time frame >15 years + you have successfully handled 1-2 bear markets
Now onto our simple framework

TTT Framework

1. Time Frame
2. Tolerance to Declines
3. Tradeoff
1.Time Frame

Higher time frames can accommodate higher equity allocation
2. Tolerance to Declines

English Translation: What extent of temporary portfolio declines will you be ok with?

There are 2 types of temporary declines:
1. Normal: 95% odds
2. Unusual: Can't be qualified - will happen but no idea when - worst case outcomes
Normal Temporary Declines:

95% of the times the 6-month range of return outcomes for Indian Equities were between -27% to 61%.
Similar takeaways from Sensex intra-year declines for the last 40+ years

10-20% temporary declines in equities are as common as your birthday!
Putting normal 6 month return expectations into our asset allocation
Unusual Temporary Declines:

But sh*t happens!

30-60% falls while not frequent do happen roughly once every 7-10 years
Adding that to our short term temporary decline expectations:
Convert % into values based on your portfolio size.

Eg for 1 cr portfolio.

Choose your poison based on the asset allocation you can live with...
3. Tradeoff between risk and returns

Add in the return expectations (a rough sensible guess)

Assuming equity returns at 12% and debt returns at 6%...
Convert % into real nos
Appreciate the tradeoff.

If you have chosen Risk 3, the drop from Risk 4 to Risk 3 will cost us around Rs 28 lakhs in the future.

But that’s fine. This is the cost for reducing our anxiety and sleeping well.
While moving back to Risk 4 might seem tempting, the key is that you need to really introspect if you will be able to stay through the journey to enjoy the outcome.

Based on all the above, pick your asset allocation knowing both the likely short term pain and long term gain.
Summing it up:
TTT Framework

1. Time Frame

* Higher the time frame higher the equity allocation
* Not more than 70% Equity Allocation
2. Tolerance for Declines

* Expected Normal Declines
* Expected Worst Case Declines
* Check in actual values and not percentages
* Adjust chosen asset allocation based on past behavior
3. Tradeoff between risk and returns

* Understand the long term trade off in returns

Own your choice and rebalance every year for +/-5% deviation.

If you like to read about this in detail check here

Happy Investing :)


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More from @arun_kumar_r

5 Apr
Thumb rule to understand Inflation: RULE of 2

In India, Inflation historically has been around 7%.
Boring Stat!

Here is what this really means -


So if our money doubles in the next 10 years, we are still at square one!
The rough math for a 7% inflation implies prices will approximately go up by

1.4x or 40% up in the next 5 years
2x in the next 10 years
3x in the next 15 years
4x in the next 20 years
How do we use this?

If your monthly expenditure is Rs 1 lakh today then it becomes

1.4x i.e Rs 1.4 lakhs after 5 years
2x i.e Rs 2 lakhs after 10 years
3x i.e Rs 3 lakhs after 15 years
4x i.e Rs 4 lakhs after 20 years
Read 4 tweets
23 Feb
1) When we start with Asset Allocation, actually we are already underweight equities (less than 100%) based on the % of temporary falls we can tolerate.
2) This default underweight does not require identifying 'when' the market will crash. But should be based on expectation (derived from history) i.e 10-20% temporary decline almost every year and 50-60% temporary fall once every 7-10 years in equities.
3) If markets happen to crash suddenly, our default underweight position (called asset allocation) will reduce the impact and debt allocation can be used to buy at lower levels
Read 8 tweets
29 Jan
Build a portfolio assuming we won't be able to predict and step out of future temporary declines.

1) Asset Allocation - Add Debt to reduce declines to a level that can be tolerated

2) Diversify via different investment styles (Quality, Value, Mid/Small, GARP, Global)
3) Rebalance Annually if equity exposure deviates +-5%

4) For large lumpsum inflows - Stagger via Time or Valuations

5) Automate monthly investments via SIP
6) Create a Bear Market plan to deploy money from debt to equity of market falls more than 20%

7) Bubble Zone Plan - To reduce equity exposure when valuations + earnings growth + sentiments indicate low future returns

Read 4 tweets
25 Oct 20
A superb recent performance may sometimes mask dangerous risk-taking. A dismal recent performance may sometimes mask a solid investment process and good long term track record. Differentiating both is unfortunately more art than science.

A thread on how to address this...
1) Consider full market cycle performance from peak to peak or bottom to bottom.

2) Check how did the performance occur - huge sector calls, concentration, mid & small cap exposure etc

3) Check downside capture ratio and declines vs benchmark in all major falls
4) Do you understand the process?

5) Do you have a rough quantitative/qualitative check for the process by looking at portfolios?

6) Will you be able to tell if the process is followed especially when a fund is underperforming?
Read 5 tweets
10 Sep 20
1) The real challenge in a bear market is that at some point, you will get fooled thinking, you should have seen the decline coming.

Then comes a stage when you think the markets will go down but don't act and it actually goes down.

This is where the mind games begin.
2) You predicted the market would fall. It fell exactly as you predicted!

If only you had listened. Regret takes over.

Looks like the market will fall again. History shows no one can predict. But f**k history. You predicted the fall.

You utter the most dangerous words...
3) "Let me exit equities and enter later"

It falls further proving you right. False Bear market rallies make you more confident on your prediction capabilities.

And finally the real rally starts amidst all the bad news. You think its yet another false rally.
Read 5 tweets
27 Jul 20
The policy response to the current crisis is unprecedented in its speed and magnitude. As a result, we have asset reflation in warp speed.

You can read the key takeaways from the recent Bridgewater note in the below thread..

1) What took three years and seven months in the Great Depression took one year and six months in 2008, and only one month in the current crisis!
2) In the Great Depression, it took 3 years 7 months from Black Thursday before President Roosevelt broke the peg to gold, allowing the Fed to print enough to stop the free fall in equities and the economy, and the reflation continued for 4 more years before the next downturn.
Read 10 tweets

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