Asset Allocation
Maximising Returns, Managing Risk.
Why does Asset Allocation matter ?
Asset allocation matters as different types of investment
perform in different ways. In very general terms, riskier
investments, such as equities, should provide the best returns over
the long term, but they will also be the most volatile. Combining
different types of investment via asset allocation in a portfolio
can help to even out these swings in value, especially if they are
"non-correlated" (i.e. their prices move independently). This is
why it usually makes sense even for growth investors to have some
exposure to bonds and cash, even though their long term potential
is less than that of equities.
The Asset Allocation of a portfolio is reckoned to account for
over 90% of the returns and has a direct impact on the level of
risk. If you have an investment timescale of 3 years you should
take much less risk than if you have over 20 years to make regular
savings. We use a range of Asset Allocation models to provide
targets for the portfolios of our clients. Our valuations then show
if there are any variances with the model.
The choice of asset allocation model depends on your attitude to
risk and your requirement for income.
Asset allocation models
| Risk Profile |
Income Required |
| Lower |
Medium |
Higher
|
| Very Cautious |
Model |
Model |
Model |
| Cautious |
Model |
Model |
Model |
| Moderate |
Model |
Model |
Model |
| Adventurous |
Model |
Model |
Model |
Asset Allocation and Market Timing
Market timing plays a minor role in investment performance
compared to Asset Allocation and we strongly recommend investors
avoid the temptation to try and second guess the markets. Contrary
to popular opinion, even professional investors cannot predict
short term market movements with any consistency and successful
investing is not based on timing decisions. However, if you are
committing a large sum, it does make sense to spread out the timing
of the initial investment.