Asset allocation is the process of selecting a mix of asset classes that closely matches an investor’s financial profile in terms of investment objectives and risk tolerance. Different asset classes have varying cycles of performance, and by investing in multiple classes, overall investment returns are more stable.
All investments involve varying kinds of risk, which can result from impacts on market movement, and changes in interest, inflation, and tax rates. Your customized asset allocation strategy will seek to mitigate risks though diversification and balance.
When done properly, an investor’s asset allocation reflects desired goals, priorities, investment preferences and risk tolerance. Asset allocation is an individualized strategy, with no ideal mix. Rather, each person’s strategy is the result of careful consideration given to key elements of his/her financial profile:
Investment Objectives: What is the identified purpose of the investment dollars – for example, to improve current lifestyle, achieve capital growth, or fund a specific goal, such as a university education or retirement.
Risk Tolerance: This reflects the investor’s comfort level with market fluctuations that can result in losses. Other risks to be considered include inflation and interest risk.
Investment Preferences: An investor may prefer one asset class over another based on a certain personal bias towards the characteristics of that class.
Time Horizon: The time frame the investor is willing to commit is a key factor in determining the best way to achieve objectives.
Taxation: Investing in a mix of asset classes will have varying tax consequences. It is important to know the differences.
An Evolving Strategy
A sound asset allocation strategy will include regular reviews.
Financial markets are constantly changing, and so will your financial situation. We do not have a crystal ball, but we are always managing portfolios with a view to periodic review and rebalancing as necessary. As you move through life’s stages, your needs, preferences, priorities and risk tolerance change and so too must your asset allocation strategy.
Asset allocation, which is driven by complex mathematical models, should not be confused with the much simpler concept of diversification.
Learn more about asset allocation by contacting us today.