What is asset allocation?
Asset allocation means dividing your total investment between different asset classes. Each class behaves differently: one may grow more over the long run but swing a lot, another is steady but grows slowly, another gives you money easily when you need it.
Diversification says “spread it out”; asset allocation says “how much in each part”. There is no single right mix for everyone. It depends on what the money is for, when it will be needed, and how much risk you can take.
Say Sharmin has two goals: her younger sister’s wedding in two years, and her own retirement in 20 years. Same person, but the two pots of money are different in nature. The wedding money has no time to recover from a big fall within two years, so stability matters there. The retirement money has plenty of time, so there is more room to aim for growth. Each goal can have its own split. The person is made up.
Why it matters to an investor
- It sets your portfolio’s character: how far it falls in a bad year and how much it rises in a good one depend largely on the split between assets.
- It matches your goals: it balances stability for near goals with room for growth for distant ones.
- It makes decisions simpler: with “how much in each type” settled before “which share or scheme”, daily news sways you less.
- It keeps emotions in check: with a split set in advance, you are less likely to move everything out of greed in a boom or fear in a fall.
The main asset classes and their roles
- Cash and short-term deposits (savings accounts, short FDRs): easy to withdraw and the value does not fall, but returns are often near or below inflation. Role: emergencies and near-term spending.
- Fixed income (sanchayapatra, treasury bonds, longer deposits): income at a set rate, far steadier than shares. Role: regular income and stability.
- Equity (shares, mutual funds): prices swing a lot, but there is more potential for growth over the long run. Role: growth for distant goals.
- Gold and land or flats: many hold them against inflation and a weaker taka. But gold prices swing too, and property is a large, lumpy amount that is hard to sell quickly.
What decides the split
Three questions matter most: when the money is needed (time horizon), how much risk you can and want to take (risk tolerance), and whether you may need to take money out along the way (liquidity). The investor guide from the US regulator, the SEC, also names time horizon and risk tolerance as the main foundations of asset allocation.
As a goal gets closer, the share of assets that swing is usually reduced and the share of steady assets increased, so that a last-minute fall does not wreck the goal. You will also hear simple rules such as “put 100 minus your age, as a percentage, in shares”. These are only a way to start thinking, because two people of the same age can have completely different incomes, responsibilities and goals.
Worked example
- Say two people each have Tk 1,00,000. A puts 80% in shares and 20% in fixed income. B puts 30% in shares and 70% in fixed income. Assume fixed income pays 9% a year.
- A bad year, shares fall 20%. A: −Tk 16,000 on Tk 80,000 and +Tk 1,800 on Tk 20,000, a total of −14.2%. B: −Tk 6,000 on Tk 30,000 and +Tk 6,300 on Tk 70,000, a total of +0.3%.
- A good year, shares rise 25%. A: +Tk 20,000 and +Tk 1,800, a total of +21.8%. B: +Tk 7,500 and +Tk 6,300, a total of +13.8%.
Result: without knowing which shares they bought, the split alone tells you whose results will swing more. Neither is “better”; the question is which split fits your goal and your tolerance. The numbers are only an example.
See the numbers as a table
| A: 80% shares | B: 30% shares | |
|---|---|---|
| Bad year | -14.2% | 0.3% |
| Good year | 21.8% | 13.8% |
Common mistakes
- Keeping everything in one kind of asset, only land, only sanchayapatra or only shares, and calling that a plan.
- Pooling money for all goals and using one split, even though some is needed in two years and some in twenty.
- Swinging the whole split towards whatever did best last year.
- Setting a split once and forgetting it. Price moves shift the split on their own, and life circumstances change too.
Before which share or which scheme, decide how much goes into each kind of asset, and match that to when you need the money and how much risk you can take.