Asset Allocation

BALANCING RISK AND RETURN

Asset allocation is the process of investing your funds across different asset classes such as stocks, bonds, commodities, or short term money market instruments. In simple terms, it reflects the principle of ‘not putting all your eggs in one basket’. The asset allocation decision is unique for each investor, as it reflects his risk preferences and investment horizon.

Since each asset class reacts to changing market conditions in its own unique way, proper asset allocation can help you maintain a portfolio with low volatility during economic and stock market downturns. This is because some assets, tend to increase in value when the prices of other assets decline. In addition, a suitable asset allocation plan increases the likelihood of good returns over time.

Each asset class contributes in its own way to your portfolio’s volatility and risk characteristics. Cash and cash-equivalents, for instance, help keeping risk low, while alternative assets may improve portfolio diversification substantially. On the other hand, precious metals have long been recognized as an efficient hedge against currency devaluation and long-term inflation.

The asset allocation decision is the most vital part of the investment process. The academic consensus regarding the importance of this decision is that asset allocation is responsible for more than 90% of a portfolio’s volatility. In determining the optimal asset allocation, our investment professionals consider your financial condition, objectives, risk profile, and investment horizon.

In addition to risk tolerance, investment horizon is a crucial factor in determining the optimal asset allocation mix. An individual in his early thirties, who is far from retirement, can hold a portfolio concentrated in relatively risky assets such as equities and corporate bonds. On the contrary, a 75 year old retiree should hold a portfolio concentrated in relatively safe assets with maturities matching his liabilities and overall low interest rate risk.