Asset Allocation

Asset allocation is the process of determining the appropriate proportions of different assets such as stocks, bonds, money market instruments etc. to be included in an investment portfolio. Asset allocation is an integral part of an investment strategy. The process begins with a decision on the broad asset categories to include in a portfolio.

The next step is to determine the exact percentage of the portfolio to allocate to each asset category. These percentages depend on the investor's risk tolerance, investment objectives and expected holding period. Securities are then chosen within each asset category and guidelines for modifying the allocation are set up.

Studies have shown that by far the most important component of investment portfolio performance is the proportion of debt to equity securities. The asset allocation decision will in some years account for as much as 90% of your portfolio's performance. Thus, the individual securities selected are of secondary importance.

The percentage of stocks, bonds and T-bills (asset mix) becomes the first and foremost decision in the overall composition of an investment portfolio. This is usually called the strategic asset allocation decision and it means that you match your objectives, and risk tolerance to a suitable asset mix.
For most investors, the range of appropriate asset allocation mixes is 35/65 debt/equity for the aggressive investor to 65/35 for the conservative investor. Strategic asset allocation today includes global diversification. Research has shown that global diversification will substantially enhance portfolio performance

There are several methods and models of asset allocation in use, based on investors' age, income level, risk tolerance etc. An investment portfolio should be given a design that reflects an investor's objectives and constraints based on his/her risk tolerance and preferences.

The information contained in this commentary is designed to provide you with general information only, and is not intended to be comprehensive advice applicable to the circumstances of any individual. We strongly urge you to seek professional assistance before acting upon information included herein.