Asset Allocation
What asset allocation should I have?
Answer
Your asset allocation should be derived from what the money is for and when it is needed, not from your age or a risk questionnaire score. A goal three years away cannot safely carry much equity whatever your appetite for risk, and a goal twenty years away should carry a lot. The portfolio's allocation is the aggregate of the allocations each goal requires — which is why two investors of the same age with the same risk tolerance can correctly hold very different portfolios.
Why "100 minus your age" fails
The rule says hold that percentage in equity. It fails because age is a poor proxy for the two things that actually matter: when the money is needed, and whether the plan survives a drawdown.
A 30-year-old saving for a house purchase in three years should not hold 70% equity. A 60-year-old with a pension covering living costs and a portfolio earmarked for their grandchildren has a thirty-year horizon and can hold far more than 40%. The rule gets both backwards, and it does so confidently.
Risk capacity is not risk tolerance
Risk tolerance is how much volatility an investor can sit through without acting. Risk capacity is how much loss the plan can absorb and still succeed. They are routinely conflated, and it is capacity that constrains the allocation.
An investor with a high tolerance and a goal eighteen months out has no capacity, and should not hold equity against that goal regardless of how calm they are. An investor with low tolerance and a thirty-year horizon has capacity but will not use it — which is a real constraint too, because an allocation abandoned in a drawdown is worse than a more modest one held.
Deriving an allocation from goals
- List the goals. Amount, date and priority for each. Retirement is a goal; so is a house deposit, a child's education and an emergency reserve.
- Set a horizon per goal. Years until the money is needed. For a goal drawn down over time — retirement — use the weighted horizon of its cash flows rather than its start date.
- Assign an equity share per goal. Broadly: under three years, no equity; three to seven years, a minority; seven to fifteen years, a majority; beyond fifteen years, predominantly equity. The bands are judgement, not law, and should move with the consequences of missing the goal.
- Aggregate. The portfolio allocation is the money-weighted sum of the goal allocations. This is the number to rebalance against.
- Check capacity. Model the portfolio through a severe drawdown. If a goal fails, the allocation is too aggressive regardless of what the bands said.
What belongs outside equity and debt
Gold has a place in Indian portfolios as a hedge against currency depreciation and as a diversifier with genuinely different behaviour, typically at single-digit percentages rather than as a core holding. Cash is an allocation, not a residue: an emergency reserve is a deliberate position sized in months of expenses. International equity diversifies away the risk that a portfolio and an investor's income both depend on one economy — which, for an Indian salaried investor holding only Indian equity, is a concentration nobody chose.
How Vestmind derives an allocation
VestStudio builds the target from goals, dates and risk capacity rather than from a questionnaire score, then tests it through drawdown scenarios before proposing it. The method, including the bands and what moves them, is in the asset allocation methodology.
Related questions
What is a good asset allocation for a 30-year-old in India?
There is no single answer, because a 30-year-old saving for a house in three years and a 30-year-old saving only for retirement should hold very different portfolios. If retirement is the only goal and the horizon is thirty years, a predominantly equity allocation is defensible. The question to answer first is what the money is for and when it is needed.
How much gold should an Indian portfolio hold?
Typically a single-digit percentage, held as a diversifier and a hedge against currency depreciation rather than as a core holding or a return engine. The case for it is that it behaves differently from Indian equity and debt; the case against a large allocation is that it produces no cash flow.
Should I hold international equity?
It addresses a real concentration: an Indian salaried investor holding only Indian equity has their income and their portfolio depending on the same economy. A modest international allocation diversifies that. The practical considerations are the tax treatment of foreign funds and the currency exposure, both of which should be deliberate.
How often should I change my asset allocation?
Rarely, and only when something about the goals changes — a new goal, a changed date, a materially different income or capacity. Changing the target because markets moved is not rebalancing; it is drifting with extra steps. Rebalancing back to an unchanged target is the routine activity.
Sources
How Vestmind does this
VestStudio is Vestmind's portfolio construction product. It turns an investor's goals, horizon and risk capacity into a target portfolio, then lets them simulate a change — a new allocation, a fund switch, a rebalance — and see its effect on risk, concentration and goal funding before any money moves.