Investment : Asset allocation will not work for the next 10 years..!

Asset Allocation - Is it Important for Long Term Goals?

by Mr. B. Padmanaban, CFP^CM

Certified Financial Planner, Chennai

After 2008 share market crash, Asset Allocation is the widely used word across investment community.

Whether we believe asset allocation will help in the long run or not, if you are saying that I will not do asset allocation then you will be considered as TABOO (A social or / religious custom prohibiting or / restricting a particular practice). It is more of forced belief than it is existed ever before!

My belief and all the data point always suggests that in the long term 100% equity will deliver better return than the asset allocation, probably asset allocation reduces the volatility in the portfolio and one needs to do the balancing religiously year on year, after sticking on to one particular asset allocation percentage which is easier to be said than to be done when we manage more clients in the future...

 

B. Padmanaban, CFP^CM

The below table suggests how the returns varies if you keep changing your asset allocation percentage. 

I have provided the excel sheet as attachment to change your asset allocation and see the returns. 

In the above table mere 2.5% CAGR generates 279 times against 132 times which is lot of money.

Investment	1,00,000					Returns	Multiples
Sensex	60%	Gold	30%	FD	10%	14.09%	115
Sensex	70%	Gold	15%	FD	15%	14.27%	121
Sensex	70%	Gold	20%	FD	10%	14.37%	125
Sensex	80%	Gold	10%	FD	10%	14.52%	132
Sensex	100%	Gold	0%	FD	0%	16.94%	279

I just went ahead one more step and see how long the impact will be in your portfolio. To my surprise it is existed for the first year only (as per Sensex from the beginning) after that equity takes control, at the end of the day returns are concerned 100% equity always outperform. But, at the same time if you start in a bear market or volatile market it takes some more year to come to break even than the 100% equity to take a grip.

S. No	Year	Sensex	FD	GOLD	100000
		70%	10%	20%		Asset Allocation	Sensex
1	1979-80	29%	7.00%	46%	30.20%	130200	129000
2	1980-81	34%	7.50%	31%	30.75%	170237	172860
3	1981-82	26%	8.00%	13%	21.60%	207008	217804
4	1982-83	-3%	8.00%	0%	-1.28%	204358	211269
5	1983-84	16%	8.00%	8%	13.60%	232151	245073
6	1984-85	44%	8.00%	7%	33.00%	308760	352905
7	1985-86	62%	8.50%	7%	45.65%	449709	571705
8	1986-87	-11%	8.50%	9%	-5.05%	426999	508818
9	1987-88	-22%	9.00%	33%	-7.90%	393266	396878
10	1988-89	79%	9.00%	3%	56.80%	616641	710411
11	1989-90	9%	9.00%	2%	7.60%	663506	774348
12	1990-91	50%	9.00%	7%	37.30%	910994	1161523
13	1991-92	267%	12.00%	25%	193.10%	2670122	4262788
14	1992-93	-47%	11.00%	-5%	-32.80%	1794322	2259278
15	1993-94	66%	10.00%	10%	49.20%	2677129	3750401
16	1994-95	-14%	11.00%	3%	-8.10%	2460281	3225345
17	1995-96	3%	12.00%	6%	4.50%	2570994	3322105
18	1996-97	0%	11.00%	2%	1.50%	2609559	3322105
19	1997-98	16%	10.50%	-14%	9.45%	2856162	3853642
20	1998-99	-4%	9.00%	-2%	-2.30%	2790470	3699496
21	1999-00	34%	8.50%	3%	25.25%	3495064	4957325
22	2000-01	-28%	8.50%	2%	-18.35%	2853720	3569274
23	2001-02	-4%	7.50%	2%	-1.65%	2806634	3426503
24	2002-03	-12%	4.25%	16%	-4.78%	2672617	3015323
25	2003-04	83%	4.00%	7%	-8.67%	2440901	5518041
26	2004-05	16%	5.25%	7%	13.13%	2761269	6400927
27	2005-06	74%	6.00%	12%	54.80%	4274445	11137613
28	2006-07	16%	7.50%	34%	18.75%	5075903	12919631
29	2007-08	20%	8.25%	8%	16.43%	5909620	15503557
30	2008-09	-38%	8.00%	29%	-20.00%	4727696	9612206
31	2009-10	81%	6.00%	22%	61.70%	7644684	17398092
32	2010-11	11%	8.25%	22%	12.93%	8632760	19311882
33	2011-12	-11%	9.25%	34%	0.03%	8634918	17187575
34	2012-13	8%	8.75%	17%	9.88%	9487616	18562581
35	2013-14	19%	8.75%	-3%	13.58%	10775560	22089472
36	2014-15	25%	8.75%	-9%	16.58%	12561609	27611840
		16.94%				14.37%

Based on the past data and the current market scenario many can believe that today we are still in a structural bull market. In a structural bull market, the result will be exactly similar to what we have seen in the table. 

Asset allocation will not work for the next 10 years, I mean it will generate much lesser and the volatility will get absorbed by equity in a year or two. When the risks are equal and mitigated in the initial year itself we should look for superior returns.

I have taken 3 balanced funds for a simple reason these funds are considered to be relatively conservative than the other balanced funds and I have the data for the last 15 years.

Total Return %  (03/03/2016)	1- Month	3- Month	YTD	1- Year	3- Year	5- Year	10- Year	15- Year
Tata Balanced Fund	-0.9	-5.46	-6.64	-9.34	18.69	14.79	14.15	18.24
ICICI Prudential Balanced	1	-5.51	-5.78	-8.73	16.54	14.33	11.54	16.14
HDFC       Balanced Fund	0.54	-5.89	-6.46	-8.44	18.3	13.95	13.98	16.78
S&P BSE Sensex	1.58	-4.94	-5.78	-16.85	9.13	5.88	8.78	12.75%

Still if you feel that asset allocation is the way, instead of you doing it, leave it to the fund manager who is managing balanced fund (switching the debt & equity based on the market) and generated far superior return than one stick on to any particular asset allocation percentage.

Our equity market is inefficient for at least another decade and actively managed fund will generate a superior return than the passive funds. It was proved for the last 20 years and it will be for the next 10 years at least.

I am not here to force you to buy my argument, just look at the practical data and take your own stand rather than forced belief that it is always good.

Hope this helps...

B. Padmanaban, CFP^CM

Certified Financial Planner

www.fortuneplanners.com

9884349173

padmanaban@fortuneplanners.com

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