Your Ideal Asset Allocation

Let’s open a can of worms. Many experts believe that choosing your asset allocation is the most important step to maximizing your investments.  Some believe the key is to be fully invested at all times.  Others talk about products, ETFs, mutual funds, stocks, dividend paying preferred shares… the list goes on.

Buy Low and Sell High

Nobody will argue with the fact that to be a successful investor you have to buy low and sell high.  There is an interesting take on this and a few other tenets if you want to Take Responsibility for Your Investment Returns.

And what would you say to an objective method to help you ensure that you buy low and sell high? The beauty of using an asset allocation framework is that it allows you to re balance your portfolio by buying what is relatively inexpensive and by selling what has enjoying above average growth.

Investing by Asset Class, by Geography, or by Sector

The beauty of using asset allocation is that no matter what your strategy, whether you investing by Asset Class, by Geography, or by Sector the asset allocation method can be used.  Here’s how it works:  let’s use a simple case of an investor with a balanced growth profile (for more on how to Determine Your Investor Profile follow the link).

• Cash or equivalent = 5%
• Fixed income = 35%
• Growth = 60%

Once you have your asset allocation, you want to determine how often to evaluate your investment portfolio.  For smaller size portfolios where the amounts added regularly are modest, annually may suffice.  Other investors with important savings already invested and/or when there are large deposits made weekly or biweekly through a periodic savings plan, the evaluation may take place monthly.  The goal is to compare the market values of your assets compared to allocations determined by your investor profile.  No matter what happened in the markets, chance are better than average that your current asset allocation has strayed from your starting point.

How to Decide What to Buy or Sell

Now here’s the subjective part.  Click on the link above to get the full range of possibilities.  For now I’ll stick with the Cole’s Notes version.  Let’s say that you started investing in January 2010 as a balanced growth investor.  After six moths your assets are now allocated as such:

• Cash or equivalent = 15%
• Fixed income = 50%
• Growth = 35%

You have a few of choices:

• Invest your excess cash in growth assets such as stocks or growth ETFs and mutual funds, and
• Sell some of your fixed income assets, particularly if you believe they are at risk once interest rates start to rise, and
• Buy more growth assets such as stocks or growth ETFs and mutual funds with the proceeds of the profits from your fixed income sales.

Now this is a simplified example, in your case you may want to validate your thoughts with a professional depending on your Relationship With Your Investment Advisor.

Your Investment Strategy

No matter which strategy you use: buy and hold, investing by asset class, geography, or sector.  No matter which products you prefer: ETFs, mutual funds, stocks, dividend paying preferred shares, bonds, debentures.  The fact that you can make an objective decision to buy low and sell high should improve your chances of being successful.

What about your experience with asset allocation?  Let us know what worked well, what could have been improved.

Author: Robert

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