A new book argues that balanced diets and balanced investments are both useful for prosperity

Let’s go back in time to December 2007. From March 2002 to December 2007, equities gave a 443 per cent return, while debt returns were modest at 39 per cent. In December 2007, all being hunky-dory, one would have been tempted to make an equity-heavy allocation. After all, seeing elevated markets and high returns for such a long time makes one believe that their portfolio is invincible.

But from January 2008 to March 2013, equities returned negative 7 per cent and debt returned a handsome 41 per cent.

The ideal portfolio would have started off with a balanced allocation, then reduced allocation towards equity as the markets rose towards the end of 2007, and then would have been protected to a great extent for the next five years with a higher allocation in debt.

But it would also depend on your investment horizon – an investor who had a long horizon and no need of liquidity would not have been as heavily impacted with an investment in equity as an investor who had a target goal set for 2010.

Let us apply the 2008 scenario to our own portfolios – Ankush’s would have taken a bigger beating than Mihir’s, but neither would be too panicked by this, as the asset allocation plan was set with a very long-term objective in mind, and this would be part and parcel of that journey.

Nobody knows how the market is going to perform, but you can use asset allocation to increase your probability of growing your portfolio in a certain way while absorbing shocks.

Here’s how equities, debt and gold have performed over the last two decades. Equities have returned the highest figures, but observe the ups and downs. Debt is relatively stable with moderate returns. Gold is the most stable with the lowest returns.

Gold, equity and debt have rallied since then – by the time we are writing in 2024, the gap between the returns from gold and equity have narrowed. These asset-class fluctuations will keep happening with changes in the macroeconomic landscape.

Equities are volatile and have a magnifying effect. Debt is relatively stable and offers capital protection to some extent.

It is not enough to merely create savings. Poorly allocated savings are equivalent to playing Jenga with your portfolio. Here’s what it would look like – threatening to collapse, but somehow held back by some prudent investments.

It is far better to have well-thought-out allocations rather than attempt to do it all and buy insignificant quantities of stocks that won’t move the needle at a portfolio level even if they increase by 100x.

Conversely, having outsized allocations negatively impacts the portfolio even with small downward movements in the underlying assets.

You are not here to take bets on future prices of assets; you are here to allocate over a long period of time into the asset classes that could probably grow the fastest.

Many people can identify a winning stock or fund, but what differentiates the good from the great is the position sizing of that stock. Given that the average success rate for an investor is typically less than 50 per cent, it matters where this money is being put to use. It is not just the frequency of winning that matters, but also the frequency multiplied by the magnitude of the payoff, referred to by Michael Mauboussin as the “Babe Ruth effect”. The only way an average Joe like us can get a multiplier effect without taking outsized risks is by following asset allocation over a long period of time.

The same holds true for allocation within asset classes. Not all stocks you buy will outperform; some might. Every instrument – whether stock, mutual fund, PMS or AIF – comes with its own set of pluses and minuses. Hence, allocate and rebalance as per your risk profile. Your allocation across DEG, as well as internally within D and E (G is easier), matters.

The same applies to CPF in health – how much are you allocating in your overall diet? People often say they are eating protein, but what percentage does it form in the grand scheme of your diet? The percentage you allocate is going to define your level of success, and that can only come from a basic understanding of macronutrient allocation.

Here’s an interesting snippet from a Harvard Health article. In the 1960s, studies funded by the Sugar Research Foundation found that cholesterol and fat were the main contributors to weight gain, and were responsible for coronary heart disease. With fat removed from most foods, it had to be substituted with carbs (i.e., sugar) to make up for taste and appeal. You will remember that fat has more calories per gram (9) than carbs (4).

So, overall, the calorie count would have gone down, right? Wrong! The quantities you eat also matter here.

Moreover, many carbohydrates come with something called a high glycemic index. This means that excess consumption of carbohydrates leads to an unnecessary increase in blood sugar levels, increasing your insulin levels to bring down that rise in blood sugar. Over time, if done frequently, this can result in insulin resistance, which can eventually lead to type 2 diabetes due to the body not having enough insulin to bring down high blood sugar. More on this will be covered in the next chapter – how excesses can lead to issues with our health and wealth.

The point is that fat cannot be demonized purely because of its high calorie count. It serves a purpose, and the quantity one consumes also matters.

To sum it up, we gravitate towards a balanced allocation. Nothing extreme, and we will do just fine.

Excerpted with permission from The Health and Wealth Paradox: How to Use First Principles Thinking to Achieve Both, Ankush Datar and Mihir Patki, HarperCollins India.