Many people do not know the word asset allocation. Recently I have been talking to reasonably successful people who have achieved fantastic financial success but with a breathtakingly risky portfolios.

This is like saying ‘I drove from Mumbai to Pune in 2 hours flat – I drove at a speed of 120 km per hr.’

Met a few people last week – and 2 SENIOR EXECUTIVES stood out dramatically in this group. Both were CEOs  and both had created net worth of Rs. 50 crores each for themselves. Sure they had very good salaries, they were investing aggressively and obviously were lucky!

However the routes chosen was very very different. The first person had bought a lot of real estate since the late 90s, flipped properties, leveraged to buy more, paid off the loans fast and every 3-4 years sold, took the profits and leveraged once more!

The second person had got a lot of ESOPs from 3 companies in which he worked – and ALL the 3 companies had done well. His net worth of Rs. 50 crores included Rs. 44 crores of one companies esop. He had leveraged, taken the esop, and held on.

What is wrong with such wealth creation? Well it is like the guy who traveled from Mumbai to Pune in 2 hours. Does it make sense NOW to continue with such dare devilry?

One important thing to note is that Big Wealth has been created using business acumen, concentrated bets, leverage, and some mind boggling risks.

HOWEVER, having created say Rs. 40 crores using such a strategy, CAN YOU AFFORD to lose it all?

The answer is NO.  You need to reduce risk (it may not improve your net-worth, but it will let you sleep better.

The concept of asset allocation is that your assets (what you own) should be split into a few asset classes so that you do not put all your eggs in one basket. The biggest asset that a 30 year old has is?

OBVIOUSLY HIS FUTURE EARNING POTENTIAL – over the next 30 years he will earn say Rs. 15 crores. All his other assets pale in significance compared to this asset. Now assuming he is in a private sector he could assume a reasonably rough  ride to become the CEO and earn much more. However if he is in the government he will get a smoother ride and an indexed pension. So really the sum total of the money adjusted for time value is really not very different. So if you have a high risk private sector job with a lot of incentive based payments, you should have a portfolio more in debt – sure, largely fixed, and secure. If you have a not very well paying government job without much cash, you should have a more variable portfolio. Thus over all balancing your risk – in the job and in the investment

So when you consider asset allocation consider the following as your assets:

Qualifications, Job, and Industry: A well qualified person in a growing industry is obviously better off. If you are working in a dying industry and you are 48 years of age, well your risk profile is lower.

Understanding and liking of assets: I understand Real Estate but do not like it as an asset class. Hey that is personal!

Know that diversification across debt classes is fine – provided you understand it – and you are happy staying saved instead of being invested.

IF I HAVE CONFUSED YOU ENOUGH, hey I have done my job….

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  1. ” Know that diversification across debt classes is fine – provided you understand it – and you are happy staying saved instead of being invested. – ” 🙂 🙂

  2. I believe in diversification, but I believe in “At any point in time, put your eggs in only one basket; keep changing the basket to whatever is the cheapest”. Last august I was fully in cyclicals, may purchase was exclusively pharma and FMCG, july august was exclusively arbitrage funds, now it is only gold ETF. So over time my portfolio is diversified and builds enough alpha by buying whatever is the cheapest at any point in time.

  3. Wow! 15 crores in 30 years. I must be in wrong industry. As a 30 years old myself, i thought i was doing fine till your article came and shattered my belief.
    How many people do I know with this kind of package? About 2-3.and there is no guarantee that they will keep earning that amount for next 30 years.
    Yes I think our potential is important but don’t u think that you are exaggerating a little?

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