Chief Investment Officer, Validus Wealth
Cheruvu has nearly two decades of experience in the financial services industry. His strengths include portfolio management, investment management, derivatives and equities. Before joining Validus Wealth, the author briefly worked at Aditya Birla Capital as head of research and advice. Cheruvu has previously worked with Coutts, HSBC Private Banking, Axis Bank and Kotak Mahindra Bank. He is a graduate of GITAM University, Vishakhapatnam with a Masters in Economics and has a Post Graduate Diploma in Financial Management from Central University.
GBI is usually the most widely adopted in which investor restrictions can also be incorporated. Consequently, you should start with identifying future goals and categorizing them based on priority and time horizon to start with.
On the basis of this, one must then backtrack the required returns that will be achieved to satisfy these objectives. Consequently, asset classes and weights should also be decided according to the risks of these assets.
Depending on an individual’s risk appetite, as well as any constraints, one might also seek to maximize the Sharpe ratio if feasible.
Once you have decided on the SAA, individual securities in each asset class must be identified on a purely bottom-up basis using fundamental analysis.
The correct price to enter would then be a second exercise as investments must be purchased at justified fair value.
The valuation could be done using a number of methods such as DCF analysis or peer valuation, amongst many other techniques such as real option based valuation. So staggered deployment would generally be the way to go.
The SAA could then be rebalanced using a fixed-calendar approach (on fixed dates, regardless of weights) or using a band approach (in which the SAA is mean-reverted once asset weights cross certain thresholds). of band).
In addition to SAA, one should also look to develop a TAA (Tactical Asset Allocation) where, on a routine basis (in addition to the initial staggered accumulation phase of SAA), one might endeavor to time the markets and buy undervalued securities at the expense to sell them. overrated ones. However, taxation should be taken into account if the TAA is done too often.
Net-net, the ideal is not to time investments or the market, but to spend time on both, as the accumulation of returns over time produces the maximum long-term return contribution.
There have been several studies that corroborate this fact stating that SAA is the main determinant of both portfolio performance and its variability.