What is asset allocation?
Asset allocation simply means spreading your investments across a range of asset types, so that you are not holding all your wealth in one type of investment. This is necessary to reduce risk and have the potential for greater gains. Many private individuals will invest in property, pensions and stocks, but there are other options to explore. There are three broad asset types – equities, fixed-income and cash/cash equivalents. Real estate (property), art and commodities are often referred to as alternative assets.
Many individuals may be holding too much wealth in property because they understand investing in bricks and mortar whereas their knowledge of other assets may be lacking. Putting money into the stock market is often viewed as a riskier strategy, but history shows that stocks outperform all other assets. Since 1986, it has taken approximately 3 years for stocks to bounce back to their previous highs following a market wide drop in prices.
Type of assets – lowest risk to highest
- Money market: Investments in highly liquid short-term assets, typically a year or less. This includes assets such as certificates of deposit (CDs), Treasury bills and short-term securities loans. Treasury bills are the most common money market investment.
- Fixed-income securities: Highly rated corporate or government bonds that pay the holder a set amount of interest. Interest payments are typically made twice a year and the principal amount invested is repaid to the investor at maturity.
- Domestic large-cap stocks: Shares issued by companies with a market capitalization above $10 billion.
- Domestic mid-cap stocks: Shares issued by companies with a market capitalisation between $2 billion and $10 billion.
- Domestic small-cap stocks: Shares issued by companies with a market capitalisation of less than $2 billion.
- Foreign developed markets securities: Securities issued by a foreign company and listed on a foreign exchange in developed markets.
- Emerging markets: Securities issued by companies in developing nations.
How to decide your asset allocation strategy
Your asset allocation strategy depends on several factors – your investment goals, the investment timeframe and your risk profile. A strategy for high growth in your twenties and thirties is likely to be replaced by lower risk options as you near retirement, although this will be influenced by your personal attitude to risk and your current circumstances. A common strategy is to invest across the main asset types in a broadly balanced way, gradually moving your assets into lower risk investments over time.
Common asset allocation strategies
1) Strategic asset allocation
Strategic asset allocation sets the asset mix for a long-term investment timeframe and aims to provide the optimal balance between expected risk and return.
2) Dynamic asset allocation
This strategy constantly adjusts the mix of assets as markets rise and fall. As the economy moves, you sell assets that decline and purchase assets that increase.
3) Tactical asset allocation
Tactical asset allocation is an active strategy which shifts the allocation of a portfolio into those assets that show the most potential for gains to take advantage of strong sectors.
Advice from Blacktower Financial Management
Achieving the appropriate asset allocation is a vital part of managing your investments and requires ongoing professional input from a wealth management adviser. Our wealth management service provides a dedicated advisor to help you plan your financial strategy to achieve your present and future goals. We’ll work in partnership with you to identify the best mix of investments and we’ll regularly review your position to help you achieve maximum return on investment. Contact one of the representatives at our Lisbon office today for your free no-obligation discussion.
Blacktower in Portugal
Blacktower’s offices in Portugal can help you manage your wealth to your best advantage. For more information contact your local office.
Antonio Rosa is the Associate Director of Blacktower in Lisbon, Portugal.
Blacktower Financial Management has been providing expert, localised, wealth management advice in Portugal for the last 20 years. We can help with specialist, advice on securing your financial future. Get in touch with us on (+351) 214 648 220 or email us at firstname.lastname@example.org.
The information contained herein is for informational purposes only which is subject to change and should not be relied upon. You should seek advice from a professional adviser before embarking on any financial planning activity.