Sharan Hegde

Stock Market has historically been the best performing asset class beating Gold and Debt by a huge margin. So for long terms goals (>7 years), logic would dictate that we should invest all our money in equity instruments such as stocks and equity mutual funds.

But is it that simple❓

The problem is that we are not rational creatures and are heavily driven by momentary emotions. In hindsight, the 14.4% CAGR of a 100% investment in the Indian Stock Market over the past 30 years looks rosy, but what if I told you that in 2008 your portfolio would have seen a 60% drop in value. Would you have been able to stomach those losses and back yourself by saying that it will rebound? As a matter of fact it did, but a vast majority of us panicked and booked the losses before the rebound happened. That's why investing is more about mindset than theoretical knowledge.

A research conducted by Capitalmind (wealth management company) found that a simple equal allocation strategy (25% Indian stocks, 25% US stocks, 25% gold and 25% debt) showed 14% CAGR over the past 30 years but with half the risk. Meaning for only a 0.4% reduction in CAGR compared to the 100% investment in Indian stocks shown above, the risk reduced by half. This strategy showed only a 30% drop in 2008 when the overall market fell by 60%.

Thus Asset Diversification is paramount to improve our risk adjusted returns and quality of sleep at night. The research further goes on to say that the best asset allocation for long term investing such as retirement or financial independence is 50% Indian stocks, 25% US stocks, 15% debt and 10% gold.

➡️ Source: Capitalmind- How to think about Asset Allocation in India Pt 1 and Pt 2
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