Asset Allocation Planning

Asset allocation is the process of selecting a mix of asset classes that closely match an investor’s financial profile in terms of their investment preferences and tolerance for risk.  It is based on Nobel Prize research that different asset classes have varying cycles of performance and by investing in multiple classes, the overall investment returns will be more stable and less susceptible to adverse movements in any one class. The study of asset risk, return, correlation and diversification on probable investment portfolio returns is vital for effective and efficient for investment portfolio construction.

Individual Strategy

When done properly, an investor’s allocation of assets will reflect his desired goals, priorities, investment preferences and his tolerance for risk. Asset allocation is an individualized strategy, so there really is no one size fits all.  Each individual’s strategy is built on careful consideration of key elements of their financial profile:

Investment Objectives: What is it the investor hopes to achieve using his investment dollars? Improve current lifestyle, achieve capital growth, fund a specific goal, such as retirement or a college education?

Risk Tolerance: This reflects the investor’s comfort level with market fluctuations that can result in portfolio drawdowns.  Inflation risk and interest risk are also considered.

Investment Preferences: An investor may prefer one asset class over another based on a certain bias or interest towards the characteristics of that asset class.

Time Horizon: The length of time an investor is willing to commit to achieving their objectives.

Taxation: Investing in a mix of asset classes will have varying tax consequences.

An Evolving Strategy

A sound asset allocation strategy includes periodic reviews.

About the only certainty when it comes to financial markets is that they will change, impacting your financial situation.  Through market gains and losses, a portfolio can become unbalanced in a particular asset class, prompting adjustments to and rebalancing of your portfolio.  As people move through life’s stages, their needs, preferences, priorities and risk tolerance also change, and so too must their asset allocation strategy.   

Asset allocation, which is driven by complex mathematical models, should not be confused with the much simpler concept of diversification.

Learn more about asset allocation by contacting us today.