How do macro economic factors like inflation and interest rates have a role to play in the asset allocation of the individuals?
While macro economic factors like inflation and interest rates could have an important role to play in terms of short-term tactical asset allocation for individuals, these factors are likely to even out in the lifetime of the investor. Hence it is crucial for an investor to have a strategic asset allocation, which is based on his risk profile and financial requirements and then fine-tune it tactically based on various macro economic factors. The investor should hence have a core portfolio, which is aligned to his asset allocation strategy. The core portion of the portfolio is primarily responsible for delivering your long-term risk return objectives. The investor can also have satellite portion of the portfolio, which is determined by the macro economic factors like interest rates, inflation or broad macro economic themes. The satellite portion of the portfolio aims to enhance but may diminish risk adjusted returns through a specific view on an asset class, security, manager or style.
