What should be the ideal investment portfolio?

During our life, we will be needing huge chunks of money for various purposes like home, vehicle, foreign trip, children’s education, daughter’s marriage, retirement and last but not least for maintaining health.

Your investment portfolio should be a right mix of  insurance, equity, debt, gold and real estate and the allocation will be based on individual’s risk taking capability, goals and the period. We have included insurance under investment as it’s an investment to safe guard your family during your ‘absence’.

When a particular asset class has appreciated, it’s important to rebalance so that your investment objectives are intact. This is very important to realize or safe guard profits.

Every instrument which has the potential to earn has the potential to loose and we need to understand this.  So equity should be in our portfolio as they outperform all other asset class over long term.

We need to invest in debt so that we can meet our short term goals and can guard against financial turmoil during which the value of your equity investments might have eroded.

Gold is considered to be a safe heaven for it’s stability of it’s value internationally. You might have noticed Gold prices soaring when the markets crash.

Real estate is another asset class where your investments can exponentially increase or decrease. Normally, they perform better than equity and are less volatile but when you invest during an upswing just like the recent real estate bubble, you tend to book losses.

So, you may ask why can’t I play safe with Debt and Gold? You can. But the question is, are your investments giving you returns (after tax) more than the inflation rate? Are your returns growing better than GDP of your country? Ideally your investment should generate returns at least 15% per annum to be considered as good investment.

So your allocation to high return/risk assets can be more when you are young and have less liabilities and should be less when you are nearing to retirement or when you wanted to utilize that money for a purpose in short term. For example, you can have debt to equity ratio as 30:70 when you are at the age of 30, 50:50 at the age of 40 and 70:30 at the age of 50. These ratios should be planned carefully with your financial planner based on your liabilities, risk taking capacity and goals.