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Asset allocation on the basis of market movement is a recipe for disaster. MFDs should always practice asset allocation on the basis of goals and cash flow, said noted personal finance author PV Subramanyam at the Cafemutual Ideas Fest 2022.
However, MFDs adopting the goal-based approach should be ready to face resistance from clients due to their limited understanding of asset allocation and the fact that they take short-term performance too seriously, he added.
"In theory, they all are long term investors, but they want to know what will happen in the next quarter. How does it matter how the market will do in the next quarter? MFDs should do asset allocation for a long period and be ready to look stupid in the short-term," he said.
'Ask them tough questions'
As per Subramanyam, the right way to prevent investors from taking too much risk is to pose tough questions.
"Don't explain alpha and beta to them. Ask them questions like how they will feel if the corpus for their daughter's education will fall short due to wrong asset allocation," he said.
Subramanyam also advised against the common notion that investors should put more money into equities when markets fall. "It is not always right. Luckily, we have witnessed only bull market in the last 13 years. But there have been phases when markets have delivered nothing for 5-6 years. Keep that in mind," he advised MFDs and RIAs at CIF 2022.
More asset allocation/business tips from PV Subramanyam:
- Make sure clients understand asset allocation. Excessive investment in anything, be it equity or debt, is risky. Equities face market risk while debt faces inflation risk
- Do not get into choosing schemes for your clients (given the fact that it is almost impossible to predict which fund will perform the best in the future). Tell them about various schemes and let them choose.
- Always discuss investments at your own office. Clients' homes are not conducive for serious discussions as there are too many distractions
