Redo Asset Allocation

At a time when everybody has overdosed on equity, elections are looking imminent, macros are getting challenging, and benchmarks are outperforming portfolios, it makes sense to take a re-look at asset allocation. Clearly, the most important thing now is to get our asset allocation right. A wrong allocation can affect our overall returns significantly over the next few years.

Elections always bring political risk that may impact returns and it makes sense to keep risks within control. The best way to do that is to rejig asset allocation quickly and to gradually return to risk over a period of time. For portfolios that are steeped in midcaps or small caps, this is not going to be easy.

But, what is good for one’s wealth creation is never going to be easy. Rejigging asset allocation requires liquidity in the stocks we want to sell. This is going to become increasingly challenging in microcaps and small caps. This is not going to be easy in midcaps either. The absence of liquidity in trade could worsen over the rest of the year and this represents the greatest risk to our wealth.

A sell-off can significantly impact portfolio valuations with liquidity hurting far more than fundamentals warrant. Ensuring we are protected from that phase can be effectively achieved by exiting the potentially volatile space and seeking safer asset options. That makes reviewing asset allocation the most sensible option right now.

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