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Importance of Sticking to Asset Allocation

Importance of Sticking to Asset Allocation


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Were you prepared for Russia’s attack on Ukraine?

Well, we were at Truemind Capital.

Not exactly for the Russia-Ukraine event, but for all the possible events that can puncture the bubble in various asset classes that were created on the back of unlimited and cheap liquidity. Read below to know HOW.

The runup in any asset class creates a delusion that the rally will be permanent. Any small correction in the prices is followed by a sharp rise. People get conditioned to this pattern and over-allocate in the asset class out of greed and by overlooking/undermining the risk factors.

One of the biggest mistakes people commit is ignoring their risk profile and suitable asset allocation, especially during runaway prices in one asset class. This is how a bubble gets bigger and bigger as people chase past returns. The prices get more expensive from their long-term mean valuations and downside risk becomes much deeper.

But the fact is that the world and our lives are not one-way streets. There are always many twists and turns along the way. Something will certainly emerge (nobody can predict the timing) that will pop the bubble. Greed overtakes rationality around market peaks which is dangerous. The same story repeats EVERYTIME.

That’s why it is important to construct a diversified portfolio across asset classes based on the risk profile, and market valuations, and assigning the possibilities of various outcomes in the future.

Your returns on investment should never be looked at individually but on the overall investment portfolio. Naturally, one asset class will always perform better than the other asset classes in a certain period and you cannot be highly certain of which asset class that would be next year. And that is the entire point of having investment diversified across asset classes.

Hence, it’s important to stick to your asset allocation plan without getting influenced by recent past returns of a particular asset class. Investing can never be successful by chasing the historical returns that have already appeared. Past returns are not a good indicator of future returns, especially in the short-medium term.

A good asset allocation plan is designed in a manner that reduces downside risk and enhances upside potential. A prudent asset allocation plan should be such that when an asset class experiences a sharp rise from its long-term mean valuation in a short period of time, the allocation towards that asset class should be reduced gradually and vice versa.

And that is How we at Truemind Capital are always prepared for any future events by realigning our portfolios based on how expensive or cheap an asset class is from its long-term mean valuation. We work on the law of Mean Reversion that has always worked in the favor of the patient, disciplined and successful investors.

Truemind Capital is a SEBI Registered Investment Management & Personal Finance Advisory platform. You can write to us at connect@truemindcapital.com or call us at 9999505324.


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