When it comes to building long-term wealth, one principle is often praised more than it is practised: asset allocation. It involves spreading a portfolio among different classes of assets, such as equity, debt, and gold. But why is this mix so important? Because different asset classes behave differently under varying market conditions. And that diversity can act as a cushion against volatility, especially during uncertain times.
Like the seasons, markets move in cycles, periods of growth, stagnation, or decline. During each phase, different asset classes take turns leading the charge.
For instance, between 2008 and 2009, equities nosedived by -51%, only to bounce back the very next year with a 78% return. In contrast, government securities (G-secs), a standard debt instrument, provided a 28% return in 2008, offering a safe haven during the equity market crash.
1 July 2025
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Similarly, in 2020, a year marked by pandemic-driven uncertainty, gold provided attractive returns, reaffirming its position as a defensive asset in times of crisis. Over five years, gold delivered a CAGR of 16.4%, while during its best run from 2007 to 2013, it posted a 25.8% CAGR over seven years, followed by a phase of consolidation with flat returns for five years.
The consistent rotation of asset class performance highlights a key insight: there’s no single winner yearly. Investors can manage tough times better by changing their investments based on the economy. This can be done by putting money in stocks and bonds, or gold during bad times.
Together, gold, equity, and debt form a powerful trio that balances any investment portfolio, with each asset class playing a distinct role. Equity is known for its potential to deliver high returns over the long term, albeit with considerable volatility.
Despite turbulent events like the 2008 Lehman crisis and the Russia-Ukraine geopolitical tensions, equity markets have consistently demonstrated strong wealth generation potential. Debt, particularly government securities, offers a stabilising force, providing steady income and acting as a cushion during economic downturns when equities falter. Gold, meanwhile, serves as a hedge against inflation and market uncertainty. Though not always the top performer, its value during periods of crisis makes it a vital component in preserving wealth. When these three asset classes are thoughtfully balanced, they create a resilient, growth-oriented portfolio and are better equipped to withstand market ups and downs.
Why Strategic Asset Allocation Matters Today
Recent years have shown us the unpredictable nature of global and domestic events, be it elections, pandemics, geopolitical conflicts, or monetary policy shifts. Despite this, portfolios with well-thought-out asset allocation have shown greater resilience.
It’s also worth noting that asset allocation isn’t a one-time task. It requires regular reviews and rebalancing to ensure that market movements don’t skew your original mix too far off course. Hence, asset allocation might not seem like the most exciting part of investing, but it’s arguably the most important. In a world where market trends constantly shift and emotional decisions derail long-term goals, a disciplined approach to balancing assets provides structure and clarity.
However, for a lay investor, managing asset allocation independently can be challenging. This is where asset allocation mutual funds prove useful. These funds are professionally managed and dynamically adjust their allocations to equity, debt, and gold based on internal valuation models.
Investors can choose from a wide range of asset allocation funds based on their risk appetite and financial goals, ideally by consulting a mutual fund distributor or a registered financial advisor.
Disclaimer: This article is not part of the Outlook Money editorial feature. The views expressed are personal and do not necessarily reflect those of Outlook Money.
Readers are advisedto do their own research or seek professional advice before making any investment decisions.
Mutual fund investments are subject to market risks. Read all scheme-related documents carefully before investing. Past performance is not indicative of future results.
Disclaimer: The Views are Personal and not a part of the Outlook Money Editorial Feature
