Question

What is your recommendation and justification for, in percentage terms, of an optimal allocation of $1,000,000 among the three asset classes.

Answer 1

Allocation among the asset classes depends on numerous factors such as:

Age of the investor

Risk Appetite

Time horizon if investment

Chances of any urgent withdrawal

And many other factors...

Depending on all this Risk, Return, Liquidity, Payback period, etc should be analyzed for all assets classes, and proper allocation should be made.

Keeping all factors in mind, optimum allocation would be as follows:

(1) 20% in Gold

Gold is an evergreen asset. It is like a safety chain. In worst of the worst crisis, gold will be least affected, sometimes, might even appreciate.

(2) 30% in Government securities

A safe asset with regular income. Instead of going for any other risk free securities or low risk securities like corporare bonds, it is better to go for pure Government Securities, because difference in return is negligible, whereas safety is concerned, it is way higher in government securities.

(3) 50% in Equities

Equities are the must in any Investment Portfolio. It is the only assets class that can beat inflation ang give higher returns, which can lead to an enormous wealth creation through the magic of compounding.

Equities in itself is a broad class. There are different options in equities too. Keeping it simple, it is good to go for equally in each if the following:

A. Index Fund (Replicate the return of the index as it is)

B. Dividend Stocks (For regular income)

C. Largecap Bluechips (Moderate Return with very low risk)

D. Mid and Small Caps (Abnormally High returns with Medium to High Risk)

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