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Published on April 10, 2008

Oil prices have skyrocketed to more than US$100 (Bt3,178) a barrel and this year we see rice prices soaring daily. How should one respond to such a situation?

The answer lies in asset allocation.

Asset allocation is not a new idea. It has been in existence for a couple of thousand years, as quoted by ancient texts. Basically, one determines one's mix of assets based on certain goals: purpose of money, cash-flow requirements and investment time horizon. Moreover, one must be able to live with it (short term) while attaining reasonably expected returns (long term).

Traditionally, inflation-hedged investment involves more or less equity investment and nowadays commodity-linked investments. In determining the appropriate asset mix, one should be able to balance between short-term volatility and the impact of inflation in the long term.

In the short run, the possible negative consequences of stock-market volatility will be much greater than the damage likely from inflation.

However, in the long run, inflation will likely dominate returns from non-volatile investment such as deposits or money-market debts.

Therefore, if the goal is the preservation and/or accumulation of wealth in real terms, this requires equity investing.

The investor should prepare himself both financially and psychologically to live through any bear market and investment cycles without having to sell at the wrong time. However, people tend to err toward optimism. Generally, they believe that higher returns are possible with less volatility than is actually the case.

There is simply too much uncertainty in the direction and magnitude of equity returns

in the short term.

Once expectations are aligned with investment actuality, there is a variety of sophisticated products to choose from, ranging from individual securities to mutual funds. Asset choices are available from money-market funds to equity funds and, recently, commodity-linked products. Choosing asset mix is also easier with balanced funds which now offer a range of predetermined asset mix which one can choose to match one's own requirements.

Prasert Khanobthamchai is senior fund manager in the Balanced Fund Management Department of Kasikorn Asset Management

Prasert Khanobthamchai