Protecting Your Investments and Minimising Volatility
In the world of investing, it is common knowledge that a diversified portfolio is essential for long-term success. However, many investors often overlook the importance of asset allocation, particularly when it comes to including alternative investments such as gold. In this article, we will explore the benefits of asset allocation and explain why allocating a portion of your portfolio to gold can provide a valuable hedge against volatility and market downturns.
Understanding the Performance of Nifty and Gold INR
Let’s begin by examining the performance of two key assets over the past year: Nifty (a benchmark index for the Indian stock market) and Gold INR (the price of gold in Indian rupees). As shown in the chart, Nifty has experienced a 7.7% increase over the last year, while Gold INR has surged by a remarkable 21.2%.
Before jumping to conclusions about gold’s superior performance, it is important to note that comparing gold to equity investments like Nifty solely in terms of returns is not accurate. Equities are known to outperform gold in the long term due to their higher risk profile. Equity investments possess the potential for significant gains but also carry a greater chance of substantial losses.
The Need for Asset Allocation
The key concept that I emphasise is the need for asset allocation. As human beings, we often struggle with managing volatility and making rational decisions when faced with market pressures. Our emotions and behavioural biases can cloud our judgement, leading to poor decision-making during market downturns.
By diversifying our portfolio and including assets with differing risk profiles, we can mitigate the impact of emotional decision-making and reduce the pain of extreme drawdowns in equity portfolios. Gold, known as the “contra hedge” to equity, provides an excellent insurance-like cover, protecting your portfolio from excessive volatility.
Have you insured your portfolio ?
We recognize the significance of insurance in various aspects of our lives, whether it be term insurance for financial protection, comprehensive insurance for our vehicles, or health insurance for our families. However, it is surprising that many fail to apply the same principle to their equity portfolios.
The narrative propagated by some market experts focuses solely on equities, disregarding the need for diversification. While equities may offer higher returns, it is crucial to consider whether we can ride out the volatility and avoid making impulsive decisions along the way.
Over the past year, we witnessed a prime example of how asset allocation can provide stability in a fluctuating market. From December to March, Nifty experienced a significant decline, while gold’s value soared rapidly during the same period.
As an investor who incorporates gold in my portfolio, I have been able to avoid substantial losses and maintain a balanced net worth. The contra movement of gold against equity has consistently buffered my portfolio against extreme market fluctuations. At my age, I prioritise minimising volatility over achieving the highest returns, even if that means my returns may be slightly lower than those who are fully allocated to equities.
Since October, we have witnessed a crack in the markets, coinciding with a rise in gold’s value. This ongoing relationship further emphasises the importance of asset allocation and highlights how allocating a portion of your portfolio to gold can act as a hedge against equity-related risks.
Mi EverGreen – The benefit of top 200 stocks + GOLD
Mi EverGreen has been specifically designed to offer stability for investors who seek long term wealth creation in the markets. This monthly rebalanced, rotational momentum strategy comes with a fixed 25% allocation to GOLD at all times which gives the much required stability during weaker market regimes.
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