Asset allocation is the foundation of investing. It decides how your money is spread across different assets such as equities, bonds, commodities, and cash. Over long periods, this decision has a bigger impact on outcomes than choosing individual stocks or timing markets.
For Indian investors, asset allocation matters more today than it did a decade ago. Equity exposure has increased, global investing is now accessible through platforms like Appreciate, and markets have become more volatile. In this environment, portfolio structure matters more than individual ideas.
Why Asset Allocation Matters More Than Stock Selection
A 1986 study titled “Determinants of Portfolio Performance” examined large institutional portfolios and found that asset allocation explained over 90% of the variation in portfolio returns over time. However, individual security selection and timing accounted for a much smaller share.
A later update to the study confirmed that this relationship held across longer time periods and different market environments. The key point was not that asset allocation guarantees higher returns, but that it largely determines how volatile a portfolio is and how deep its drawdowns can be. These factors shape real investor experience far more than short-term performance.
How Asset and Geographic Diversification Reduce Risk
Asset allocation manages risk mainly through diversification. Diversification is not about owning many investments. It is about spreading exposure across different economic drivers.
Different asset classes behave differently. Equities benefit from economic growth. Bonds tend to perform better when growth slows and interest rates fall. Commodities such as gold have historically provided support during periods of inflation or global stress. Each asset responds to a different set of conditions.
Geographic diversification works alongside this. Portfolios invested only in Indian assets depend heavily on domestic growth, policy decisions, and currency movements. Adding global equities introduces exposure to other economies and business cycles. The study “Global Equity Investing: The Benefits of Diversification” demonstrated that international equities helped reduce portfolio volatility over long periods while delivering returns comparable to those of domestic equities.
For Indian investors, this approach has an added benefit. Investing in markets such as the U.S. and Europe also means exposure to foreign currencies. When the rupee weakens against currencies like the U.S. dollar, returns from overseas investments increase when converted back into INR. Over long periods, this currency effect has helped boost global equity returns for Indian investors, adding another layer of diversification beyond asset performance alone.
Why Correlation is the Key to Diversification
Diversification works only when assets do not move together. This idea comes from “Portfolio Selection”, the 1952 paper by Harry Markowitz. Markowitz showed that portfolio risk depends not only on how risky each asset is, but also on how assets move relative to each other. This relationship is called correlation.
When correlation is low, losses in one asset can be partly offset by gains or stability in another. This reduces overall volatility without cutting expected returns. This is why a portfolio with fewer uncorrelated assets can be more stable than one holding many similar investments.
Correlation can change over time. The study “Correlation, Diversification, and Crisis” found that asset correlations tend to rise during global market stress. This explains why diversification feels less effective during crises. It also shows why portfolios should include assets driven by different forces, not just multiple versions of the same risk.
Why Discipline and Rebalancing Matter
Even a good allocation can drift. Strong performance in equities can slowly increase risk beyond what an investor intended.
The paper “The Role of Rebalancing in Portfolio Management” showed that periodic rebalancing helps control risk without relying on forecasts. Rebalancing trims assets that have grown too large and adds to those that have fallen behind. This keeps portfolios aligned and reduces emotional decisions.
Asset Allocation for Indian Investors Going Global
For Indian investors using Appreciate, asset allocation now includes global equities and U.S.-listed ETFs alongside domestic investments. This expands access to sectors and companies not available in India.
Global assets also introduce currency exposure. Over time, this can add diversification rather than risk if managed at the portfolio level. Appreciate allows Indian investors to add global exposure as a long-term allocation choice, not a short-term trade.
Conclusion
Asset allocation is not complex, but it is powerful. Decades of research show that it shapes volatility, drawdowns, and investor behaviour across market cycles.
For Indian investors building global portfolios, getting asset allocation broadly right matters more than picking the perfect stock. Investments will change over time. Portfolio structure lasts.
Disclaimer: Investments in securities markets are subject to market risks. Read all the related documents carefully before investing. The securities quoted are exemplary and are not recommendatory.
