Asset Allocation: A tale of two brothers and their portfolios

Ever wondered why some people, despite similar beginnings, end up in vastly different financial positions? While the media bombards us with tips on what to invest in, the true differentiator often lies in how much to invest in different asset classes – a concept called asset allocation. It’s the unsung hero of long-term wealth creation. Get it right and you build real wealth. Get it wrong and you might struggle. 

Meet brothers Amit & Babu: A Divergent Path

Amit and Babu, two brothers, grew up in the same house, went to the same college, landed similar jobs, and earned nearly identical salaries. Both were diligent savers, disciplined professionals, and responsible fathers. Yet today, in retirement, their lives look strikingly different.

Amit lives in a spacious apartment in a premium locality. He travels abroad twice a year, spends freely on hobbies and doesn’t think twice about upgrading his gadgets or car.Babu, on the other hand, resides in a modest home in a quieter suburb. His vacations are rare, and every large expense is a well-debated decision.

Did one earn more than the other? No.Did one save less? Not really.The difference lies in how they invested.

The Investment Gap - Why  "Playing Safe" isn’t always safe?

What led to such a stark difference? To understand the divergence in the brother’s fortunes, we can turn to Performance Attribution - a method which explains the ‘why’.  A prominent study in this field by Brinson, Hood, and Beebower (BHB),, demonstrated that asset allocation is the primary driver of portfolio returns. This finding was further reinforced by the Ibbotson & Kaplan study, which concluded that approximately 90% of the variation in returns across diversified portfolios can be explained by asset allocation, while asset selection, interaction effects, and market timing play significantly smaller roles.

Numbers don’t lie

A closer look reveals that Amit diversified his investments across fixed deposits, provident funds, and equities—primarily mutual funds and index-linked investments. Babu’s approach felt prudent: no risk, guaranteed returns, no market anxiety. But in avoiding volatility, he also avoided growth.

Let's illustrate this with a simplified example, mirroring the choices of Amit and Babu: (we will ignore the impact of taxes for now).

We analyzed portfolios comprising the Nifty 500 (proxy for equities) and Nifty 15-year & above G-Sec (proxy for fixed income) in different proportions from April 2019 through May 2025.

	Portfolio 1	Portfolio 2
Nifty 500	75%	25%
Nifty 15 year & above G-Sec	25%	75%

While Portfolio 2 (akin to Babu’'s debt-heavy approach) undoubtedly offered a smoother return path with less volatility, Portfolio 1 (akin Amit’'s equity-heavy strategy), despite its inherent volatility, resulted in significantly higher overall growth. 

Amit's willingness to embrace a calculated risk in equities paid off handsomely over the long term. While fixed income instruments like fixed deposits offer stability but they struggle to beat inflation over the long term. 

Short cuts are not strategies

Generic guidelines like the "120 minus age" rule for equity allocation or simply dividing equally among available asset classes are shortcuts. While they offer a starting point, true asset allocation should be a personalized process determined by your unique needs, financial goals, risk-return profile, capital market expectations, and the prevailing economic outlook. A one-size-fits-all approach may keep you afloat—but it won’t help you thrive.

Summary: Same path, different destinations

The tale of Amit and Babu is a reminder that wealth creation isn’t just about earning or saving - it is about allocating wisely. In an age where headlines are dominated by stock picks, meme stocks, or hot ETFs, it’s easy to underestimate the power of strategic asset allocation. But for long-term investors, it remains the most consistent and dependable driver of returns and critically, it’s accessible to everyone.

• Asset allocation is the single largest determinant of long term portfolio performance.

• It is a non-skill based alpha, driven by strategic decisions rather than timing or selection.

• It’s not about avoiding risk, but managing it intelligently.

• A well-balanced portfolio, tailored to your goals, can make the difference between a comfortable retirement and a constrained one.

So the next time you think about investing, don’t just ask what to buy. Ask how much of each to buy—and why. Because in the long run, it’s not just where you invest—it’s how you allocate that defines your financial future.

Work with a financial advisor to get the mix right. That’s the real alpha.