Wikipedia describes asset allocation as the rigorous implementation of an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to the investor’s risk tolerance, goals, and investment time frame.

In layman terms, at the time of need, even if the markets are turbulent, you should be able to achieve your financial goal. This is what an ideal asset allocation strategy must achieve for an investor. This is the true essence of a successful financial plan.

Asset Allocation, the true essence of a successful financial plan, is primarily dependent on two factors, Risk Profile and Time Horizon. When a change occurs in any of these two factors, the asset allocation undergoes a drastic change as well.

Recently, I met an ex financial planning client of mine, Mr Verma. After exchanging pleasantries, I enquired about his investments and if he was on track towards achieving his financial goals. Mr Verma looked a bit worried and hesitantly replied, ”The markets are down by 5000 points from the peak, nobody’s financial planning goals are getting achieved!”.

I politely disagreed. The truth is, in the past year PersonalFN has created approximately 100-120 financial plans and portfolio reviews, and none of the clients have complained about the dip in the markets. They are actually happy and call us to know where to add fresh money and take advantage of the fall!

The reason for our client’s confidence is Asset-Allocation.

[Read: Why You Should Not Ignore Personalized Asset Allocation While Investing]

Our clients are well aware that their financial plans are created keeping in mind a personalised asset-allocation strategy. Even though a dip in the market will surely affect their long-term equity portfolio, they will sail swiftly through the market ups and downs in the short term.

That’s because 80-85% of the assets are usually maintained in debt instruments.

Then why was Mr Verma worried? Like a majority of Indian investors, Mr Verma had failed to grasp the importance of periodical reviews of his financial plan. This led to a skewed asset-allocation and derailed his financial plan.

Table 1: The Graduation Goal

Family Member	Poornima Verma
Goal	Graduation
Goal Date	1-Apr-20
Present Value of Goal (In Rs)	15,00,000
Years to Goal	6
Inflation p.a.	11.00%
Future Value of Goal (In Rs)	28,05,622

Mr Verma had approached us for financial planning services in 2014. At that time, one of his medium-term high priority goals was his daughter’s graduation in 2020. The present value of the goal was Rs 15 Lakh which would inflate by 11% y-o-y and cost him Rs 28.05 Lakh in 2020.

Since Mr Verma’s risk profile was “Medium-High”, his personalised asset allocation strategy was set as below.

Table 2: Ideal Asset – Allocation Strategy

Risk Profile	Medium - High
Time to Goal (Years)	Asset Allocation
	Equity	Debt	Gold
6	45%	45%	10%
5	35%	60%	5%
4	30%	65%	5%
3	5%	90%	5%
2	5%	90%	5%
1	0%	100%	0%

His cash flow was aligned to the goal as below.

Table 3: Goal Planning

Financial Year	Fresh  Investment	Opening Balance			Investment Amount
		Equity	Debt	Gold	Equity	Debt	Gold
2014-15	3,00,000	-	-	-	1,35,000	1,35,000	30,000
2015-16	3,50,000	1,09,892	1,88,386	15,699	1,22,500	2,10,000	17,500
2016-17	5,00,000	2,11,668	4,58,615	35,278	1,50,000	3,25,000	25,000
2017-18	6,00,000	64,182	11,55,271	64,182	30,000	5,40,000	30,000
2018-19	6,00,000	99,519	17,91,349	99,519	30,000	5,40,000	30,000
2019-20	-	-	27,44,141	-	-	-	-
Total	23,50,000

 

Financial Year	Closing Balance			Time to Goal	Asset Allocation
	Equity	Debt	Gold		Equity	Debt	Gold
2014-15	1,43,623	1,39,707	30,646	6	45%	45%	10%
2015-16	2,53,403	4,17,954	34,204	5	35%	60%	5%
2016-17	3,96,650	8,24,757	62,228	4	30%	65%	5%
2017-18	1,03,800	17,89,193	97,395	3	5%	90%	5%
2018-19	1,43,378	24,66,616	1,34,146	2	5%	90%	5%
2019-20	-	29,22,510	-	1	0%	100%	0%
Total	-	29,22,510	-

Assumed return on Equity-12% p.a. ~ Assumed return on Debt- 6.5% p.a. ~ Assumed return on Gold- 4% p.a.

 

As is evident in the above table, his asset allocation will change y-o-y and eventually by the start of the 3rd year, his equity portion would be only 5%, and 90% of his amount will be allocated in Debt instruments. Mr Verma would have easily achieved his financial goal, but the reality was far from ideal.

Mr Verma was two years away from his financial goal, and as per the recommended asset allocation, his equity allocation should have been 5%, but in reality his allocation to Equity was 45%, the same allocation, as 2014-15.

Ideally, 5% of the portfolio should be at risk, compared to the 45% risk the portfolio faced now.

With the elections in the coming year, the markets would be extremely volatile and Mr Verma’s 45% equity allocated portfolio will tumble further, increasing his goal deficit.

Like many, Mr Verma would have to inevitably take a loan from relatives or banks or withdraw from his PPF savings, which was earmarked for his retirement.

It’s like a domino effect, one tile (goal) tumbles and the rest follows.

If only Mr Verma would have headed our advice and reviewed his portfolio every year, an experienced financial adviser would have ensured that he follows the recommended asset-allocation strategy and stay on track to achieve his financial goal. Trying to save on the financial planning review fees has indeed cost him very dearly.

As I said Mr Verma goodbye, I couldn’t help but feel sad. Clients share more than their financial goals with financial planners, they share dreams and aspirations as well.

When their dreams go awry, as financial planners, even we share our clients' disappointment.

As I headed back to the office, I got a text from Mr Verma enquiring about the financial planning review process. This time he didn’t discuss the fees, he just wanted to get started immediately.

So, can Mr Verma be saved? Of course! It isn’t over till it’s officially over.

A lot of reallocating of assets will be required with a higher investment amount, and forgoing of a couple of family vacations, but we could get it done. Mr Verma can proudly achieve his daughters’ graduation goal and PersonalFN will ensure he does.

Mr Verma has learned his lesson, what are you waiting for? The next time your adviser calls about the financial planning renewal of your portfolio, think twice before you say ‘No’. It could cost you very dearly in the end.

As far as effective and efficient financial planning and honest unbiased financial planners are concerned, look no further, and reach out to PersonalFN's Financial Guardian on 022-61361200 or write to info@personalfn.com. You may also fill in this form and our experienced financial planners will reach out to you.

PersonalFN is a SEBI registered investment adviser. We will be happy to help you.

Happy Planning!

Editor’s note:

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