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 of your attitude to risk and your requirement for income.
Asset allocation models
| Risk Profile |
Income Required |
| Nil |
2-4% |
Over 4% |
| 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.