The world is a shade of grey. Many a time most debates are reduced to black and white opinions - diversification Vs concentration, high quality Vs unproven quality, buy and hold Vs momentum based churning.
Anyone not in a position where one has to stick to a stand and build reputation/business based on that approach has an inherent advantage. Why not go with a hybrid model? Problem is that we are told by media/gurus to find one philosophy and stick with it. Once again this is a narrative that we don’t need to fall for as retail/non-professional investors.
What do I mean? My portfolio has concentration and diversification at the same time. 20% of my net worth in one stock but 40% allocation to fixed income and the remaining 40% spread across 15-20 well researched stocks. Not easy to slot this into a specific narrative but who cares, it works well for me.
Some people aren’t comfortable with volatility by nature, concentration doesn’t work for them unless they have some operational control on the business too. Speak to promoters who have 70% of their net worth in their own listed business, they don’t see that exposure as equity since they have operational control. The same Jeff Bezos would have a different allocation pattern if he weren’t running the show at Amazon.
Capital allocation should ideally be a function of who you are and how you see money. Those who are already wealthy often trade alpha for peace of mind, the incremental 4-5% return does not move the needle for them. But those who have aspirations of doubling their net worth every 3 years will try to squeeze out every additional 1% at every opportunity and also have a high equity allocation.
Over the past 6 months I have allocated more to FD than to equity, but that is an outcome of my personal utility function that seeks to balance out my life. I have both investment income and operating income dependent on how the market performs, the world looks different to me though I’ve always had 60%+ in equities over the past 5 years (March 2020 included).
A general rule that works well is that higher your alpha generation capability, lesser can be your equity allocation. If all you do are index funds/ETF that can deliver 12-14% over the medium term, you will most likely need higher equity allocation to create wealth. However if you can generate a return of 25%+ through stock picking, 50% might suffice during most times. When the bottom falls off the market, you can allocate more money and make more return than someone who is sitting at 60% equity allocation.
The average user on this forum should think deeper and not go by the superficial gyan peddled by media. Media likes to simplify the message so that even a dart throwing monkey can take away a few basic rules. The average user here is way smarter than that.
Wealth management is still in the primitive stage in India, building asset allocation models is reduced to a few things like -
Age of the person
Allocation to equity, fixed income, real estate and gold
Liability and event/goal based planning
The most important variable (behavioral and attitudinal profile of the person towards money) cannot be quantified, this can only be evaluated through a comprehensive exercise by a wealth manager who has both the IQ and the experience to be able to do so. The average age of the wealth manager in India is 35 years and they have less than 20% of their own money invested in equities. Go figure how much of an advisor he/she can be. Some successful wealth managers are exceptionally dumb people, they can talk their way out of anything but cannot make sense of financial statements.
The primary goal of any capital allocation framework should be that you always live to fight another day even if the market falls 50% and stays there for 3 years. Once this is ensured the rest of the steps become subjective based on a variety of factors. 40% allocation to fixed income works differently at a net worth of 10 Cr than it does at a net worth of 50 lakh.