Ajit is a young executive working in a middle level management in an MNC. His financial advisor asked him to invest all his money in equities and equity mutual funds, since the market was touching new highs. Ajit did so, only to find that during the recent market crash, he ended up losing his money. Why did this happen? Where did Ajit err?

Ajit made the biggest mistake made by so many investors. They take fancy to a particular asset, either due to security it offers or high returns it generates. In the process, they ignore other asset classes, thus suffering financial loss.

In order to overcome this problem, it is essential to do proper asset allocation. In asset allocation, you diversify your portfolio amongst stocks, bonds, gold and realty. This is done after taking into account your age, income, investment objectives and investment time frames.  But the main factor that affects the asset allocation is your risk profile.

Those with a conservative profile should focus around 60-70% of their portfolio on bonds, FDs, realty, cash and gold and the rest in equities. For a balanced investor, the proportion of portfolio that can be divided between equity and other assets can be 50:50. An aggressive investor can have 80-85% exposure to equity.

As you become older and near your retirement age or your liabilities or number of dependents increase, you have to keep on rebalancing your asset allocation in order to take into account the new circumstances. This will help you meet the change in your circumstances very easily. Just don’t be swayed by greed or fear as it can cause financial loss in the long term.

Ajit didn’t go for asset allocation also called as diversification. Hence he suffered massive losses.