“Asset allocation, where to park your money and how to divide it up, is the single most important skill of a successful investor” – said businessman, author and coach Tony Robbins. The most important factor that determines your allocation strategy is not only risk, return, etc., but actually your time horizon. The longer the runway available to you, the more is your ability to (1) take higher risks for higher returns, (2) invest in different asset classes, (3) live through many more cycles, and (4) generally have more flexibility with your goals and investing style.
The inverse is also true where a lesser time horizon implies more risk aversion and a more conservative approach to wealth building. Let us understand these with an example. Let’s assume you want to access your corpus at 65 years of age. This is what your approach can be based on the age bracket you are in.
In Your 20s
Most professionals are just getting their first salaries in their 20s. The typical impulse with your first few paychecks is to spend, spend, spend! And you know what? You should. I personally believe we spend too much time with our heads down studying hard, and then working hard; so much so that we forget to have fun.
Your 20s is the best time to get different life experiences and buy impractical things just because you want to. So, my advice is to do all of that.
Now the serious part: a rupee you save in your 20s will grow to approximately Rs45 in 40 years at about 10 per cent annually. This is a 45 times growth just based on time – your money will have worked very hard for you.
Therefore, strike a balance and try to save about 20 per cent of your salary. At this stage, you can be 80-90 per cent invested in higher-risk assets like equities. Within equities, allocate more to mid/ small cap mutual funds if your risk appetite allows. Further, you can consider other volatile asset classes like cryptocurrencies to a limited amount to hold for the very long term. The balance allocation can be to debt and Public Provident Fund (PPF). In insurance, be sure to have adequate health insurance and if needed, then life insurance (term plans are a good option).
Mistakes you should avoid:
Putting money mainly in fixed deposits (currently, these earn you a negative rate of real return)
Buying insurance policies with assured payouts. Do the math on the internal rate of return (IRR) of these policies and you will see that they almost never add up
Buying a house too early, which ties up a lot of capital that could have been invested to be compounding …….