My Asset Allocation Rules

No Rocket Science. Just a simple set of rules to remove discretion from investing decisions

The other day, a colleague – let’s call her Rutuja – asked me where she should invest her money. She was weighing up options between investing more into stocks versus buying real estate. As we chatted, I realized how much of our conversation kept circling back to one core idea: asset allocation.

It got me thinking that maybe sharing my own approach could be helpful. So, in today’s edition, I’m sharing my portfolio, how I split my investments, and more importantly, the rules I use to make these decisions. The goal is to keep fear and greed from hijacking my financial choices and to sleep a bit better at night, no matter what the markets are doing.

A Snapshot of My Portfolio: What I Hold and Where

Here’s how my investments are spread out, not counting real estate for a moment:

• Equity (US Stocks, RSUs, Mutual Funds, etc): 73%

• Fixed Income (Debt, EPF, VPF, etc): 18%

• Gold: 8%

• Cash: 1%

Rupee vs Dollar Currency Split

Another layer to this is how my investments are split between Indian Rupees (INR) and US Dollars (USD). Excluding real estate, my portfolio looks like this geographically:

• USD Holdings: 57% (This includes my Google RSUs, direct US stock investments, and Gold which is dollar linked).

• INR Holdings: 43% (This covers my Indian mutual funds, debt products like EPF and VPF, Debt Mutual Funds, and cash in the bank here).

My Rules: Trying to keep emotions out

Okay, so those are the "what" and "where." But let’s get into the "how" and "why".

1. Long-Term Goals First: My biggest driver for equity investments is my long-term goals. For instance, my son is about 3 years old, and I know his higher education will be a significant expense roughly 15 years down the line. A good chunk of my US investments are earmarked for this. Thinking long-term makes it easier to ride out the short-term ups and downs of the stock market.

2. Knowing My Jitter-Level aka Risk Appetite: It sounds impressive to say you're "100% in equity," but I know myself. I get antsy if my portfolio gets too heavily skewed towards stocks. So, I've set a rule: whenever my equity allocation creeps up to the 77-80% mark, I start to book some profits and shift that money into cash. Funnily enough, this often happens when the markets are feeling a bit frothy and possibly nearing a peak. It’s worked out well so far. Even if the market continues to climb after I sell, I’m okay with it. My peace of mind, knowing I’ve locked in some gains and can deploy that cash elsewhere (like real estate or just holding it), is worth more to me than squeezing out every last drop.

3. Buying the Dips: On the flip side, when my equity allocation drops to around 60-65% (usually during a market dip), I start deploying my cash reserves to buy more equity, aiming to bring it back closer to the 70-72% level. For example, going into March’25, I was sitting on about 10% cash, and my equity portion had fallen to around 65-68%. I used that cash to buy more, bringing my equity back up to roughly 75%.

   So, without me having to predict market tops or bottoms, my system guides me to:

   • Reduce equity (sell) when markets are high and things feel expensive.

   • Increase equity (buy) when markets are down and assets are cheaper.

Where Do Real Estate, Gold, and Debt Fit In?

• Real Estate: This comes into play when I've booked significant profits from equity. Imagine that scenario where my equity hits 77%, I trim it down to 65%, but instead of a market correction, the bull run continues, and my portfolio quickly goes back up to 75% equity. I'd trim it again. After a couple of rounds like this, I can end up with a substantial cash pile. That’s when I look to deploy it into something tangible like real estate. I’ve done this once, with a parcel of land I bought in Bhopal.

• Gold: My approach to gold is pretty straightforward – I aim to keep about 5% of my overall portfolio in it. It’s a bit of a brainless, set-it-and-forget-it allocation. I typically top it up once every 3-4 years as my overall portfolio grows, just to maintain that percentage.

• Debt: I see my debt investments primarily as a cushion for any medium-term expenses that might pop up unexpectedly. A large portion of this is locked into my EPF (Employee Provident Fund) and PPF (Public Provident Fund), so those are also contributing to my retirement. For any new investments I make in debt, I’m currently favoring Gilt mutual funds.

No System is Perfect, Mine Included!

Now, while this system works for me by keeping things disciplined, it's definitely not flawless, and it’s good to be aware of that. Here are a few flaws with this that you should keep in mind:

• Those Equity Percentages: The 77-80% for selling or 60-65% for buying equity? They're based on my comfort and what I've seen, but they aren't magic numbers. It means I might sell a bit too early if a market keeps soaring, or buy a tad too soon if things keep dropping.

• Real Estate & Stock Market Timing: Deciding to buy property mainly when I’ve got cash from stock profits means I’m not always diving into the real estate market at its absolute best. It’s a trade-off for cash management.

• Gold's Simple Role: That "brainless" 5% for gold is easy to manage, but it’s not very dynamic. A more active approach might fine-tune it better depending on what’s happening globally.

• The USD/INR Mix: My current split between Rupees and Dollars, with a fair bit in USD, is partly an outcome of things like my Google RSUs. It's not so much a active currency strategy I'm tweaking all the time, but more how things have shaped up.

So yup, this is a bit of an ongoing experiment! Hopefully, this gives someone like Rutuja – and maybe you too – a few ideas or a framework to think about as you navigate your own investment journey.

P.S. Speaking of investments and journeys, I’m planning to make a video soon detailing my experience and learnings from purchasing that land parcel in Bhopal. If you’re interested in property, a bit of a behind-the-scenes story, or just want to see what that adventure was like, make sure you’re subscribed to my YouTube channel and hit that bell icon so you don’t miss it!

Thanks for reading!