You need a judicious mix of debt & equity investments
One of the cornerstones of planning one’s personal investments is supposed to be asset allocation. The theory is that different individuals, based on their own needs, will choose a combination of debt, equity or other assets that will be best suited to them.india Updated: May 31, 2010 22:50 IST
One of the cornerstones of planning one’s personal investments is supposed to be asset allocation. The theory is that different individuals, based on their own needs, will choose a combination of debt, equity or other assets that will be best suited to them. As time passes and their lives move on, this balance is supposed to change. There’s a whole body of conventional wisdom-some of it wise, some not-about how professional life, marriage, children and age should impact the proportion of money or amount that an individual should invest in equity or debt.
Interestingly, this conventional wisdom ignores something that many a financial adviser knows, even if it’s unarticulated knowledge. The most important determinant of your asset allocation is not whatever is specified by some principle of asset allocation, but whether a particular investor is an equity person or a debt person. There are equity people and there are debt people and a member of either party is psychologically incapable of defecting to the other. The debt could be any type-bank fixed deposits or the various government-backed schemes or anything else-but there are those who need to know how much they will earn and that’s that.
If you get a debt person to invest in equity, the uncertainty of the market’s gyrations makes them way too nervous and they run away sooner or later even if they appreciate the logic of investing in equity. And equity people consider all debt investments to be a waste of time or money. They feel that anything that underperforms whatever stock they would have invested in is actually a loss.
This sharp bipolarity is reflected in the actual investment portfolios that people have. An large proportion of people are either invested almost completely in either debt or in equity for the discretionary part of their investments. It almost goes without saying that both equity people and debt people are wrong. There are very few investors whose ideal asset allocation is 100 per cent in one direction or the other. If you fall in either of the two extreme groups, you need to recognise that you are missing out on either a certain amount of safety that you need or a certain amount of returns that you deserve.