Question

What should be the resource for asset allocation? Should it be 60/40 a reasonable allocation strategy?

Answer 1

Asset Allocation, of all, is one of the most important decisions of investing. One cannot confine to just Equity or Debt and say 60/40 is a reasonable allocation strategy. The decision of asset allocation should be based on the investor's ability as well as the appetite for risk.

For example, a person in mid-20s has both short term and long term goals for financial independence for the future and starts to save and invest. In this case, a typical investor of that age has a long time horizon for most of the future goals like investing for kids higher education, buying a home in 10-12 years. Hence there is enough time to build the portfolio and take on some risk initially since his/her daily expenses might leave some savings for any emergency requirements. For such a person, a higher proportion of equity, 80%, and 20% debt would be more suited than a 60/40 allocation.

In another case of a 60-year-old retired person with a huge sum of retirement benefit received at the end of his career would look to invest so that his/her monthly expenses can be taken care without taking on much risk. Here an 80% Equity and 20% Debt allocation would be ill-suited as equity investments are always risky and for an investor of such age, with few financial goals, it would mean disaster in case the markets tumble. He/she would not be left with much for their lifetime in case of unexpected losses.

A famous allocation strategy is (90-investor's age)% in equity and the remaining in debt.

If not confined to Equity and Debt, there are other investment avenues as well like Gold and Real Estate which have proven better than the conventional investment instruments during some periods in history.