{"id":2930,"date":"2021-09-21T06:06:00","date_gmt":"2021-09-21T06:06:00","guid":{"rendered":"https:\/\/rakshithpai.com\/?p=2930"},"modified":"2021-10-21T16:04:28","modified_gmt":"2021-10-21T16:04:28","slug":"portfolio-allocation-asset-correlation-importance","status":"publish","type":"post","link":"https:\/\/rakshithpai.com\/portfolio-allocation-asset-correlation-importance\/","title":{"rendered":"Portfolio Allocation, Asset Correlation &#038; its importance!"},"content":{"rendered":"\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_65 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<p class=\"ez-toc-title\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-662c68f223145\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\" style='display:none' id=\"ez-toc-cssicon-toggle-item-662c68f223145\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/rakshithpai.com\/portfolio-allocation-asset-correlation-importance\/#Introduction\" title=\"Introduction:\">Introduction:<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/rakshithpai.com\/portfolio-allocation-asset-correlation-importance\/#How_to_allocate_your_portfolio\" title=\"How to allocate your portfolio?\">How to allocate your portfolio?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/rakshithpai.com\/portfolio-allocation-asset-correlation-importance\/#What_is_a_good_portfolio_allocation\" title=\"What is a good portfolio allocation?\">What is a good portfolio allocation?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/rakshithpai.com\/portfolio-allocation-asset-correlation-importance\/#How_do_I_determine_my_portfolio_allocation\" title=\"How do I determine my portfolio allocation?\">How do I determine my portfolio allocation?<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/rakshithpai.com\/portfolio-allocation-asset-correlation-importance\/#What_is_a_7030_portfolio\" title=\"What is a 70\/30 portfolio?\">What is a 70\/30 portfolio?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/rakshithpai.com\/portfolio-allocation-asset-correlation-importance\/#What_is_1-Two-7_portfolio_approach\" title=\"What is 1-Two-7 portfolio approach?\">What is 1-Two-7 portfolio approach?<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/rakshithpai.com\/portfolio-allocation-asset-correlation-importance\/#What_is_the_best_portfolio_for_retirement\" title=\"What is the best portfolio for retirement?\">What is the best portfolio for retirement?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/rakshithpai.com\/portfolio-allocation-asset-correlation-importance\/#What_does_asset_correlation_mean\" title=\"What does asset correlation mean?\">What does asset correlation mean?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/rakshithpai.com\/portfolio-allocation-asset-correlation-importance\/#What_is_the_best_correlation_for_a_portfolio\" title=\"What is the best correlation for a portfolio?\">What is the best correlation for a portfolio?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/rakshithpai.com\/portfolio-allocation-asset-correlation-importance\/#For_more_information_check_our_YouTube_video\" title=\" For more information, check our YouTube video: \"> For more information, check our YouTube video: <\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-11\" href=\"https:\/\/rakshithpai.com\/portfolio-allocation-asset-correlation-importance\/#Also_read\" title=\"Also read:\">Also read:<\/a><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Introduction\"><\/span><strong>Introduction:<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Diversifying our investments into various assets such as equity, precious metals like gold and silver, bonds, real estate, foreign funds, and others. <strong>We are minimizing our risk whilst trying to maximize our investment returns.<\/strong> It&#8217;s to not put all your eggs in the same basket.&nbsp;<\/p>\n\n\n\n<p>You have to diversify your investments. <strong>For all we know is that we do not know how dynamic the current financial system is. And, we will never know what comes until it does.<\/strong> Look for yourself, the current covid crisis hit hard the real-estate industry the most! And, if you were one amongst those who held huge rental properties, all leveraged! What will you do?<\/p>\n\n\n\n<div class=\"wp-block-buttons is-content-justification-center is-layout-flex wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button is-style-outline\"><a class=\"wp-block-button__link has-text-color has-background\" href=\"https:\/\/zerodha.com\/open-account?c=PR4768\" style=\"border-radius:50px;background-color:#e4fa00;color:#0f0027\" rel=\"nofollow\"><strong>Open Zerodha Account Now!<\/strong><\/a><\/div>\n<\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"How_to_allocate_your_portfolio\"><\/span><strong>How to allocate your portfolio?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><strong>There&#8217;s no foolproof strategy.<\/strong> Allocation is all yours to decide. <strong>It&#8217;s a combination of scientific analysis and a pinch of art.<\/strong> But, I can&#8217;t leave it such.&nbsp;Hence, here&#8217;s my advice.<\/p>\n\n\n\n<p>If your financial situation is good, meaning&#8230; if you have no debt or very few financial obligations or financial burdens. Then, do consider equity, and other more volatile assets for investment, because with volatility comes more returns at times. <strong>And, if you already have debt or other financial obligations then reduce your equity investment and allocate some portion into bonds, gold &amp; silver, and properties.<\/strong><\/p>\n\n\n\n<p><strong>I truly believe in India&#8217;s capability to create wealth with respect to stock market investing and, hence, will definitely have &#8220;equities&#8221; in my portfolio no matter what my financial situation is.<\/strong>&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_a_good_portfolio_allocation\"><\/span><strong>What is a good portfolio allocation?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>You might have heard the concept where one suggests allocating your Equity investments based on your age by simply deducting your age from100 and whatever balance is left should be your equity investment of the total portfolio. Allocating investments into Equity and other volatile and risky ventures based on one&#8217;s age makes no sense. <\/p>\n\n\n\n<p>For example, Mr.X is 72 years old and is a multi-millionaire. He has no financial obligations or burdens and is living a comfortable lifestyle. He wants to invest in equities cause he believes that equity is the best asset class to invest in. Would you suggest him to invest just 28% of his entire portfolio into equities? In another case, Mr. Y is a young lad who just came into the workforce and is 25 years. Mr. Y has a Student loan, Car EMI, and other financial obligations. Now, based on the earlier logic of suggesting an individual to invest in Equities based on age! WIll you suggest Mr. Y to invest in Equities?<\/p>\n\n\n\n<p>Answer for both the above question can be &#8216;Yes&#8217; or &#8216;No&#8217;. We can&#8217;t say! Because this is one such decision that cannot be generalized. Based on your ability to take risks and our current financial conditions. At times, even having a full 100% &#8220;Crypto&#8221; portfolio might also seem not to be a bad idea. (not suggested!)<\/p>\n\n\n\n<p>It&#8217;s all based on you! Your ability to take risks and your expectations on returns. And, it is suggested to have a diversified portfolio with not one asset class given complete focus.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"How_do_I_determine_my_portfolio_allocation\"><\/span><strong>How do I determine my portfolio allocation?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>As said earlier. It&#8217;s all based on your risk-return analysis. And, there&#8217;s no one standard formula or method to address this question. And, your optimal asset allocation is the combination of investments, ranging from the most aggressive to the most conservative, that will generate the total return you require overtime. Stocks, bonds, and cash or money market securities are included in this mix. <strong>The percentage of your portfolio you allocate to each is determined by your time horizon and risk tolerance.<\/strong><\/p>\n\n\n\n<p><strong>Below, I have given two prominent approaches to the said topic:<\/strong><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_a_7030_portfolio\"><\/span><strong>What is a 70\/30 portfolio?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>This investment strategy aims at total return by investing in a diverse portfolio of stock and fixed income asset classes with a target risk of 70% equities and 30% fixed income assets. This is done to concentrate on growth and safety. <strong>By investing 70% in growth-oriented asset classes such as Equity and investing the balance 30% in safety-oriented asset classes such as debt or bonds for regular and consistent earnings.<\/strong><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_1-Two-7_portfolio_approach\"><\/span><strong>What is 1-Two-7 portfolio approach?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Under the 1-2-7 approach, we follow the same logic as said above and for the same purpose. But, here we dedicate 10% of our portfolio towards safe assets such as Gold, Silver and a portion as cash and cash equivalents.<strong> And, the next 20% will be invested into the broader market such as &#8220;Index fund&#8221; or &#8220;ETF Investing&#8221;. <\/strong>This way, we make earnings alongside the growth of the market whilst not taking more risk.<\/p>\n\n\n\n<p>The balance 70% of the portfolio will be invested aggressively into the Equities and bond market for growth and higher returns. This part of the investment is further bifurcated in two parts wherein, your investment is segregated as &#8220;Growth Investing&#8221; and &#8220;Value Investing&#8221;. To know more about this method. Click <strong><a href=\"https:\/\/rakshithpai.com\/how-to-construct-a-profitable-investment-portfolio\/\">here!<\/a><\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_the_best_portfolio_for_retirement\"><\/span><strong>What is the best portfolio for retirement?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><strong>For retirement benefits, you need to consider investing in those assets which give better returns and it should also be an option that gives considerable tax benefits.<\/strong> I have a list for you to consider. Check the below-attached table.<\/p>\n\n\n<div class=\"su-table su-csv-table su-table-responsive su-table-alternate su-table-fixed\"><table><tr><th>Sl.No<\/th><th>Particular<\/th><th>Section (for reference)<\/th><th>Tax implications<\/th><\/tr><tr><td>1<\/td><td>Provident Fund (PF)<\/td><td>80C<\/td><td>Deductions upto Rs. 1.5 lakh.<\/td><\/tr><tr><td>2<\/td><td>National Pension Scheme (NPS)<\/td><td>80C + 80CCD<\/td><td>Deductions upto Rs. 1.5 lakh. Additionally, Rs. 50k deductions allowable.<\/td><\/tr><tr><td>3<\/td><td>Senior Citizens Saving Scheme (SCSS)<\/td><td>80C<\/td><td>Deductions upto Rs. 1.5 lakh.<\/td><\/tr><tr><td>4<\/td><td>Mutual Fund Investing<\/td><td>80C<\/td><td>Deductions upto Rs. 1.5 lakh. (Under ELSS funds)<\/td><\/tr><tr><td>5<\/td><td>Fixed Deposit<\/td><td>80C<\/td><td>Deductions upto Rs. 1.5 lakh.<\/td><\/tr><tr><td>6<\/td><td>Unit Linked Insurance Plan (ULIP)<\/td><td>80C<\/td><td>Deductions upto Rs. 1.5 lakh. Additionally, returns are exempt u\/s 10(10D)<\/td><\/tr><tr><td>7<\/td><td>Sovereign Gold Bond (SGB)<\/td><td>-<\/td><td>Only interest in taxable<\/td><\/tr><tr><td>8<\/td><td>Government Securities<\/td><td>80C<\/td><td>Deductions upto Rs. 1.5 lakh.<\/td><\/tr><tr><td>9<\/td><td>Hybrid Funds Investing<\/td><td>80C<\/td><td>Deductions upto Rs. 1.5 lakh.<\/td><\/tr><tr><td>10<\/td><td>Savings - Regular &amp; Recurring account<\/td><td>80TTA<\/td><td>Deduction upto Rs.10,000 in interest income.<\/td><\/tr><tr><td><\/td><\/tr><\/table><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_does_asset_correlation_mean\"><\/span><strong>What does asset correlation mean?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><strong>Each asset acts and reacts to various news and situations differently.<\/strong> And, this difference is what makes them a favorable hedge against one another. <strong>Asset correlation reduces the volatility in your portfolio.<\/strong> This is what fund managers are paid for. They spend their entire professional career allocating investments into various assets that have zero, positive or negative correlation as per their likes.<\/p>\n\n\n\n<p>For example, gold goes up when equities are down, hence a negative correlation. The same is true&nbsp;for bonds towards equity. Another example of negative&nbsp;correlation would be when interest rates are down, the liquidity flush into the equity market is greater. Just like what we saw during the Covid bull run.<\/p>\n\n\n\n<p><strong>Zero correlation or positive correlation is when the two assets do not react to one another or react simultaneously in the same m<\/strong>anner. Now, that being said. Build your portfolio accordingly.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_the_best_correlation_for_a_portfolio\"><\/span><strong>What is the best correlation for a portfolio?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Correlation is a mathematically-based method for selecting investments that, when combined, produce the highest returns for a given degree of risk. The theory seeks the optimal connection between the expected return and the volatility of several possible investments. <strong>If the anticipated return correlation between two assets is 1.0, they are perfectly connected.<\/strong> If one gains 5%, the other gains 5%. If one falls 10%, the other also falls 10%.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"For_more_information_check_our_YouTube_video\"><\/span> <strong>For more information, check our YouTube video:<\/strong> <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<figure class=\"wp-block-embed is-type-video is-provider-youtube wp-block-embed-youtube wp-embed-aspect-16-9 wp-has-aspect-ratio\"><div class=\"wp-block-embed__wrapper\">\n<div class=\"ast-oembed-container \" style=\"height: 100%;\"><iframe loading=\"lazy\" title=\"Portfolio allocation, Asset correlation, and its importance!\" width=\"500\" height=\"281\" src=\"https:\/\/www.youtube.com\/embed\/eeSebgmczmo?start=26&#038;feature=oembed\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" referrerpolicy=\"strict-origin-when-cross-origin\" allowfullscreen><\/iframe><\/div>\n<\/div><\/figure>\n\n\n\n<div class=\"wp-block-buttons is-content-justification-center is-layout-flex wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button is-style-outline\"><a class=\"wp-block-button__link has-text-color has-background\" href=\"https:\/\/zerodha.com\/open-account?c=PR4768\" style=\"border-radius:50px;background-color:#e4fa00;color:#0f0027\" rel=\"nofollow\"><strong>Open Zerodha Account Now!<\/strong><\/a><\/div>\n<\/div>\n\n\n\n<p> <strong><strong>Disclaimer: <\/strong><\/strong>All the information on this website is published in good faith and for general information purpose only.  <\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Also_read\"><\/span><strong>Also read:<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<ul><li><strong><a href=\"https:\/\/rakshithpai.com\/best-investment-plans-india-middle-class\/\">Best Investment Plans in India for Middle Class<\/a><\/strong><\/li><li><strong><a href=\"https:\/\/rakshithpai.com\/how-to-invest-in-stock-market-a-beginners-guide-to-investing\/\">How to Start Investing? A Beginners Guide to Investing<\/a><\/strong><\/li><li><strong><a href=\"https:\/\/rakshithpai.com\/how-to-construct-a-profitable-investment-portfolio\/\">How To Construct a Profitable Investment Portfolio?<\/a><\/strong><\/li><li><strong><a href=\"https:\/\/rakshithpai.com\/investing-in-your-20s\/\">Investing tips in your 20s<\/a><\/strong><\/li><li><strong><a href=\"https:\/\/rakshithpai.com\/investing-in-your-30s\/\">Investing tips in your 30s<\/a><\/strong><\/li><li><strong><a href=\"https:\/\/rakshithpai.com\/portfolio-allocation-asset-correlation-importance\/\">Portfolio Allocation, Asset Correlation &amp; its importance!<\/a><\/strong><\/li><li><strong><a href=\"https:\/\/rakshithpai.com\/best-warren-buffett-quotes\/\">Best Warren Buffett Quotes<\/a><\/strong><\/li><\/ul>\n","protected":false},"excerpt":{"rendered":"<p>Introduction: Diversifying our investments into various assets such as equity, precious metals like gold and silver, bonds, real estate, foreign funds, and others. We are minimizing our risk whilst trying to maximize our investment returns. It&#8217;s to not put all your eggs in the same basket.&nbsp; You have to diversify your investments. For all we [&hellip;]<\/p>\n<div class='heateor_sss_sharing_container heateor_sss_vertical_sharing heateor_sss_bottom_sharing' style='width:44px;right: -10px;top: 100px;background-color: Dark Blue' data-heateor-sss-href='https:\/\/rakshithpai.com\/wp-json\/wp\/v2\/posts\/2930'><div class=\"heateor_sss_sharing_ul\"><a aria-label=\"Facebook\" class=\"heateor_sss_facebook\" href=\"https:\/\/www.facebook.com\/sharer\/sharer.php?u=https%3A%2F%2Frakshithpai.com%2Fwp-json%2Fwp%2Fv2%2Fposts%2F2930\" title=\"Facebook\" rel=\"nofollow noopener\" target=\"_blank\" style=\"font-size:32px!important;box-shadow:none;display:inline-block;vertical-align:middle\"><span class=\"heateor_sss_svg\" style=\"background-color:#0765FE;width:40px;height:40px;margin:0;display:inline-block;opacity:1;float:left;font-size:32px;box-shadow:none;display:inline-block;font-size:16px;padding:0 4px;vertical-align:middle;background-repeat:repeat;overflow:hidden;padding:0;cursor:pointer;box-sizing:content-box\"><svg 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