Asset Allocation Pyramid

After you have decided which stock to invest in, the next most important question is: How much money to invest? But this question is often neglected by many. As your experience will tell you, stock markets tend to be very volatile. And putting too much money in a single stock or sector can be very risky. That is why we advice our subscribers to have a well-diversified portfolio comprising the appropriate proportion of small cap, mid cap and large cap/ blue-chip stocks. Based on their relative riskiness, we have created an Asset Allocation Pyramid that can help you in deciding how much money you should invest in a stock. However, it must be noted that the allocation levels could differ from person to person depending on the risk appetite. In our view, large cap/ blue-chip stocks are the safest of the lot. Because of their large size, they may not grow as fast as small caps or mid caps. But they are relatively more stable and resilient to negative macroeconomic developments. This keeps them in good stead over the long term and makes them reliable wealth creators. As such, we have assigned them a significantly higher weightage. According to us, large cap/ blue chip stocks should comprise at least 60% of your total equity portfolio. However, a single large cap/ blue-chip should not form more than 5-6% of your total portfolio. This is to make sure that even if a certain blue chip stock does not deliver as per expectations, the overall portfolio is not affected to a great extent.