The Importance of Being Prepared
Many investors today, especially younger ones, often ignore the need for hedging their investments. This is mainly because markets have done well over the past decade. When returns are strong, people tend to forget that markets can also go through long periods of underperformance. Just like we buy insurance for our car or home in case of accidents, we also need to prepare for times when markets don’t perform well. Asset allocation is that form of preparation—it gives a sense of safety.
What Is Asset Allocation?
Asset allocation means dividing your money across different types of assets like equity, gold, fixed income, and cash. The idea is not to depend only on one asset. If one doesn’t do well, others might. Having different types of investments helps reduce risk and ensures that your returns are more stable. For example, if equity stays flat or falls for a few years, gold or fixed income can help your portfolio stay balanced.
Real Returns Show the Value
Let’s look at some simple examples from the last one, three, five, and ten years (see the image below).
In the past year, gold gave a return of 40%, while equity gave a negative return of 0.31%. Over three years, gold rose by 23% each year, while equity gave 13% annually. Over five years, gold returned 12.8% per year and equity gave 16.4%. In ten years, gold gave 13.3% yearly returns, and equity gave 11.3%. These numbers clearly show that there are times when non-equity assets can perform better or help balance out your portfolio.
Thinking Beyond the Numbers
It’s not just about the best return. It’s about building a smooth journey. Imagine a situation where equity doesn’t grow for three to five years. If your money is only in equity, it can be stressful. But if you’ve invested in gold or fixed income too, those parts of your portfolio may grow and provide comfort. Asset allocation helps reduce the emotional stress of investing during slow or bad times.
Make the Journey Comfortable
Long-term investors often believe that equity will beat all other assets over 30 years. That might be true. But the path to those 30 years shouldn’t be full of worry. A smart mix of different assets makes the journey easier and more enjoyable. It also protects you from shocks during rough market phases.
