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Designing an Investment Strategy Asset Allocation

Asset Allocation
Asset Allocation is the cornerstone of successful long-term investing. Many experts agree that the overwhelming determinant of investment performance is the asset allocation decision: what asset categories to use and in what percentage. According to studies, this decision accounts for over 90% of the investment results achieved. Assets are spread among diverse types of securities, such as domestic stocks, foreign stocks, and bonds, because the performance of different asset classes is not always closely related. For example, some periods have been weak for domestic stocks but remained strong for domestic bonds, and vice versa. It is impossible to predict which particular asset category will perform best this year or next. It is important to recognize that holding asset classes that may not be in vogue at the moment can pay off in the long run.

Broad asset class diversification is an effective strategy for minimizing volatility risk. Too heavy a weighting in the shares of any one company or industry, or solely in one country, is not prudent. In an increasingly global economy, attractive opportunities are not limited to domestic markets. Over time, appropriate international investing can provide increased returns and lower risk as opposed to a domestic only portfolio.

To put it simply: asset allocation means that you have an investment plan consisting of many different asset classes, each with a target weighting and you follow it for the long term. Different types of assets carry different levels of risk and potential for return, and typically don’t respond to market forces in the same way at the same time. When one asset type is declining in value, another may be appreciating (though there are no guarantees). Periodically you will want to trim back the one that has grown past its target, adding that excess to an asset class that is under its target, balancing things out again. You don't have to worry if the market goes up or down over the short term, you just have to be disciplined and adhere to your plan.

 

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