2.8 Asset Allocation and Do-It-Yourself versus Professional Help

Asset Allocation Is the Big Decision

Asset allocation is the division of a portfolio across asset classes — equity, debt, gold, cash. It matters more than any other decision because the classes behave differently enough that the mix, rather than the choice within each class, determines most of the variability in a portfolio's returns over time.

The practical implication is uncomfortable for an industry that markets scheme selection: an investor with the right allocation and mediocre funds usually outperforms one with the wrong allocation and excellent funds. A 90% equity allocation for a two-year goal is a serious error that no amount of fund quality repairs.

Strategic Asset Allocation

Strategic asset allocation is the long-term target mix set from the investor's goals, horizon and risk profile. It is deliberately stable and is not revised because of market news.

Indicative strategic allocations:

A long-standing rule of thumb sets equity at 100 minus age, giving a 35-year-old 65% equity. It is a starting point only. It ignores goals, income stability, dependants and existing wealth, and it produces absurd results at the extremes — a 70-year-old with a large corpus and a bequest motive may correctly hold far more than 30% equity, because the money's horizon is the beneficiary's, not the holder's.

Tactical Asset Allocation

Tactical asset allocation is a deliberate, bounded, temporary deviation from the strategic mix in response to a view on relative valuations — for example moving from 60% equity to 50% when equity valuations look stretched, with the intention of returning to 60%.

Three conditions make it legitimate rather than market timing dressed up:

1. Bounded. Deviations are limited, commonly to plus or minus 10 percentage points.
2. Temporary. There is an explicit intention and trigger to return to strategic weights.
3. Reasoned. It rests on a stated valuation basis, not on recent price action or news flow.

For most retail investors, tactical allocation destroys value because it is executed as recency bias with a professional label. The honest recommendation for most clients is a strategic allocation, held.

Rebalancing

Market movement causes drift. A 60:40 portfolio after a year in which equity returns 25% and debt 6% becomes:

Equity: 60 x 1.25 = 75.0
Debt:   40 x 1.06 = 42.4
Total            = 117.4
Equity weight = 75.0 / 117.4 = 63.9%

The investor now carries meaningfully more equity risk than intended, purely through inaction. Rebalancing sells enough equity to restore 60:40.

Two common triggers:

• Calendar rebalancing — review at a fixed interval, typically annually. Simple and behaviourally robust.
• Threshold rebalancing — act when a class drifts beyond a band, such as 5 percentage points. More responsive, more transaction-intensive.

Rebalancing enforces selling what has risen and buying what has lagged, which is exactly what herd behaviour and recency bias resist. Note the practical frictions the syllabus expects you to raise with clients: rebalancing triggers capital gains tax and may attract exit load, so it should be executed thoughtfully — using fresh contributions to top up the underweight class is often cheaper than selling the overweight one.

Do-It-Yourself versus Professional Help

The curriculum closes the unit by asking whether an investor should manage their own investments. An honest answer needs three tests.

Time. Selecting, monitoring, rebalancing and handling paperwork takes ongoing hours, not a weekend of research.

Knowledge. Reading a scheme information document, distinguishing categories, understanding duration and credit quality, and applying the tax rules correctly are all learnable — and all commonly done badly by confident amateurs.

Temperament. The hardest test, and the one that cannot be self-assessed reliably. The question is not whether the investor understands that markets fall, but whether they will hold, and keep contributing, through a 35% drawdown with no one to talk to.

Direct plans are the DIY route within mutual funds and carry a lower expense ratio because no distribution commission is embedded. That saving is real and compounds. It is also smaller than a single badly timed exit. The genuine comparison is not "commission versus no commission" but "the cost of the regular plan versus the cost of the mistakes the distributor prevents."

For an investor with time, knowledge and demonstrated temperament, direct plans are entirely rational and a distributor should say so. For the majority — who lack at least one of the three — professional help is worth its cost, provided the professional actually does the job: quantifying goals, setting an allocation, documenting a risk profile, rebalancing on schedule, and being available in the week the market falls.