In discussions with various people, the question about asset allocation always comes up. Some want to know what asset allocation they should follow. Others question my asset allocation. Unfortunately, there is no one answer for what asset allocation one should go with. Everyone’s situation is different and their risk appetite is different. They should go wih an asset allocation that they are comfortable with. If they can’t figure it out by themselves, then they should hire a financial planner who can tell them what asset allocation to go with given their situation and mindset. If you push me to give one number, I always say 70% in equity and the rest in fixed income if you plan to retire early, but even otherwise too. In this post I want to go into some nuances.

If you don’t know anything about asset allocation, it might help you to read about it in one of my earlier post. Why do we care about asset allocation anyway? Asset allocation helps to reduce your corpus volatility without forgoing too much in terms of returns. It is a way of preserving capital. Now, preserving capital may not make sense for everyone. If you have no investments at all, then what are you preserving? Likewise, if you have a very small investment, it should not worry you too much to lose a big chunk of it since it is a small corpus compared to your end goal. In those cases you can go for maximum returns and little care for preserving capital. Of course this does not apply universally, but it could be one thought process.

For a young person with no investments at all, asset allocation has no meaning and they should instead focus on saving more and investing in equities until the corpus is substantial. Similarly, for them, market timing is almost useless. Anytime is a good time to invest. The market may not fall when they want to invest more. The waiting game can be painful. If you have too much cash without investing it, you may be tempted to use it to buy something that you might not even need. Since their investment corpus would be small, there is no point selling their investments when the market is high (profit booking) in the hope that it will crash soon. For young investors, their only aim should be to invest. Don’t worry about asset allocation.

For an older person with a lot of investments, asset allocation is important because they have to think about preserving the capital since they don’t have a long runway to build wealth if there is a major crash. But then again if you have such a large corpus compared to your expenses that it does not matter to you if the value becomes half in one market crash, you could still go for a high asset allocation. Suppose you have Rs. 10 crores and your expenses are Rs. 10 lakhs per year. Then your corpus needs to be Rs. 2.5 crores “only”. Assuming you have trust in the 4% rule.

For them, they could still go for 100% equity if they have the stomach for it. May be they want to let the money grow fast and don’t lose sleep during a market crash of 50% and have confidence that the markets will eventually bounce back in their life time. They can leave a bigger inheritance or donate more or what ever it is they want to do with the money after their demise. Alternatively they can go for 100% fixed income if they don’t have a long life ahead of them and they trust that the inflation will not catch up with them. May be they want safety of capital and don’t see inflation as a risk because their expenses have been pretty stable even as inflation is raging.

Some may prefer a 50:50 asset allocation. The best of both worlds. May be they want a decent growth of corpus to keep up and beat inflation. Yet at the same time they don’t want to risk too much. As you can see, if you have a lot of money, and not much life left, you have a ton of choices mostly based on how much risk they are willing to take. The asset allocation is a problem mainly for the rest of the people. Those who are in the middle of their career and don’t have a big corpus built yet. They may want to go with an asset allocation that changes with their age and how much corpus they have built at that stage in life.

If you have no idea on how to change the asset allocation based on your stage of life and level of corpus, you need a financial planner who can do it for you. If you don’t like to spend money on a financial planner or don’t trust them, then just go with 70% equity and 30% fixed income asset allocation. It is a bit higher risk endeavor, but will help you reach your goals faster. In the worst case, you will have to delay your goals a little bit. However, if your goals cannot be delayed, for example money required for kids education, then go for lower asset allocation to equity, say 50%. I generally suggest the 70:30 asset allocation even to retired folk if they can keep their expenses to under 4% of their corpus.

People don’t seem to like a high exposure to equity after retirement. I understand the anxiety. But the reason I suggest 70:30 is majorly for those who want to retire early or for those who earn less money. For those who earn quite a bit and not in a hurry to retire early, it may not make sense to take on the risk of higher equity post retirement. Remember I am talking about asset allocation post retirement. Up to a few year before retirement do have good allocation to equity unless your income is crazy and you think you can build a retirement corpus with just fixed income funds and your huge savings.

Other than those suggestions, I don’t have anything else to add with respect to asset allocation. It very much depends on the person and varies widely from person to person.