Asset Allocation Strategies
Posted on:
Raffi Pailagian
MBA, BSc, DipFP
Financial Planner / Managing Partner
3 Questions To Consider When Building Your Asset Allocation Strategies
Before launching into developing your strategy, you may want to consider asking yourself these three basic questions, so key elements are not overlooked.
In our last article we talked about Modern Portfolio Theory and the Efficient Frontier. The key to success in using those theories is in the asset allocation, the art of developing target allocations by asset class, which can help focus your investment portfolio decision making. So how do you go about determining, and managing your asset allocation?
1 – Do you have a Financial Plan?
First things first. Before looking at what assets you want in your portfolio, you need to establish a few criteria by which you can evaluate your decisions. The best way to do this is to work with Financial planner to develop a Financial Plan or Statement of Advice. This Advice document will provide a roadmap for all future investing and will help you keep a clear head if the financial markets get rocky. Things you should cover in your Statement of Advice from an asset allocation and investment perspective include:
- Goals and objectives in relation to returns and growth
- Your risk tolerance/profile
- Time horizon, this might be your retirement age, or you might have a date in mind to cash out for other reasons
- Liquidity requirements, how much cash do you need on hand for emergencies?
- Asset classes or specific investments you particularly want to include, and those you might like to exclude
- Benchmarks for minimum and maximum deviations within the asset allocations
- A systematic review process for when and how you review your allocations, including reasons not to make any changes
- Your tax position
Once you have this statement, it is important to review it on a regular basis, to make sure the decisions you initially made are still relevant to your needs.
2 – Which Asset Classes Should Be Included?
Traditionally there have been three main asset classes:
- Equities
- Fixed Income
- Cash
But in recent decades, additional classes have become popular. A well thought out financial plan is now likely to include:
- Real Estate
- Commodities
- Futures
- Cryptocurrencies
Specifically which asset classes you should include in will depend on multiple factors, including the current market environment, investment horizon and financial goals, but in most scenarios, diversification across multiple asset classes is an optimal strategy.
3 – Strategic vs Tactical Asset Allocation?
There are essentially two main types of allocation, Strategic and Tactical:
Strategic Asset Allocation
This type of asset allocation is closely aligned with the passive investment strategy that we talked about in an earlier article. The important thing to watch is the differing returns by asset class, as this will ‘unbalance’ your allocation over time. So it is important to monitor your portfolio and, from time to time, rebalance where necessary.
You may also find that over time your financial roadmap or plan as documented in the Statement of Advice changes. This might be due to impending retirement, changes in your work situation or family dynamics. When this happens, it is important to look at your asset allocation and make sure it is still in line with your objectives.
Tactical Asset Allocation
This type of asset allocation is more like the active investment strategy that we mentioned. Whilst there is still an overarching strategic asset mix, an investor using Tactical Asset Allocation may temporarily change their asset mix to take advantage of opportunities that present themselves, often unexpectedly. The balance is then returned to the original mix once the short-term opportunity has passed.
Tactical Asset Allocation can also happen within particular asset classes. It may be that a particular company or industry sector is performing outstandingly well and you can adjust your levels of investment accordingly.
Some studies have shown that as many as 46%[i] of investors use Tactical Asset Allocation to take advantage of market trends.
Don’t Fail to Plan
Whether you are a high risk, high return investor who might wish to take advantage of tactical opportunities, or a more cautious investor who is more inclined to stick closely to their strategic plan, there is benefit in developing an Asset Allocation plan as it provides a focus for all investment decisions.
If you would like some advice on how to prepare your Investor Policy Statement, or to discuss how Strategic and Tactical Asset Allocation can help you meet your investment needs, please contact us on 02 9976 3388 or click below and we’ll be in touch.
Interested in knowing more?
[1] https://www.ai-cio.com/news/secret-smaller-endowments-foundations-outperformance/
Related
Related Posts
Investing In A Low Interest Rate Environment
Almost unbelievably, the last time there was a rate rise in Australia was November 2010, when the rate went from 4.5% to 4.75%. It’s been…
Read MoreTax Effective Investing In Australia
Is your investment strategy optimised for tax efficiency & what should tax effective investing in Australia ideally include?
Read MoreInvestment Opportunities
With so many investment opportunities being created by the current global market environment, where should you focus?
Read MoreBuilding Generational Wealth
Understanding the principles behind building generational wealth is becoming of increasing interest, driven by amongst other things the current cost of living increases
Read MoreMortgage Rate Update
We are celebrating our 11th Year Helping clients reduce their interest rates and realise their dream of buying a home or investment property
Read MoreDe-Risking Business Growth
Although de-risking business growth stands as a fundamental goal for every ambitious venture, these 6 strategies are often overlooked
Read MoreSuper Death Benefit Tax
In Australia, superannuation is a nest egg many rely on for a comfortable retirement, but what happens to your super savings if you pass away?
Read MoreThe Concessional Contributions Cap
Understanding the concessional contributions cap can be a powerful tool for building retirement savings & maximising your super
Read MoreDownsizer Contributions
What Is the downsizer contribution concession and why could this be relevant to you if you’re nearing retirement?
Read MoreRisk Profiling
Risk Profiling is possibly the most important but often the most misunderstood and overlooked element when investing
Read MoreHow To Use Debt To Create Wealth
Not all debt is created equal. In fact, if you’re careful and think about it strategically, you can actually use debt to create wealth
Read MoreLooking for a Home Mortgage?
Developing a good understanding of the key concepts, before looking at specific mortgage products, can help with fast tracking the selection process.
Read MoreWhat Is Refinancing?
What is refinancing, when should you do it, does refinancing impact your credit rating, & is there anything else you need to know?
Read MoreFinancial Wellbeing
It’s easy to assume higher income means more financial wellbeing, and there is a strong correlation, but it is not the only factor at play.
Read MoreWhy Use A Mortgage Broker
With a wealth of information at all our fingertips thanks to the internet, you might wonder why use a mortgage broker?
Read MoreReasons To Refinance
With interest rates rising, it’s worth understanding how you can benefit by going to the trouble of refinancing.
Read MoreTax Deductions On Investment Property
Property is a popular investment asset, particularly in Australia, due to whole host of attractive benefits which include the allowable tax deductions on investment property
Read MoreTax Bracket Creep
We thought this might be a good time to take a look at the current income tax system and how you might be able to mitigate its effect on your take home income.
Read MoreHome Mortgage Rates
With the significant increase in Home Mortgage Rates over the last 10 months, what options are there to minimise their impact?
Read MoreHow Much Do You Need to Retire?
If you feel like the answer to this question is a constantly moving target, you’re right. Working out how much you need to retire can be a complicated task.
Read MoreSustainable Investing
So what is sustainable investing, how can it help your bottom line & does it makes sense for more people to be considering?
Read MoreEstate Planning
You probably have at least a vague idea about how you would like your assets, or your ‘estate’, to be divided amongst your family, loved ones and other potential beneficiaries, but you won’t be there to oversee what happens.
Read More5 Small Business Strategies
There is a temptation in business to review small business strategies at the beginning of the new financial year, but sometimes a better choice can be the new calendar year.
Read MoreFinancial Planning For A Great Year
With the current high inflation, high interest rate environment, it has never been more important to take a serious look at your financial position
Read MoreRetirement Planning For Small Business Owners
Retirement planning for small business owners can be much more complex than for employed people, due to a selection of factors.
Read MoreApplying for a Mortgage
Applying for a mortgage is both exciting and scary, but there are a few things you should know, that can move the needle away from scary, towards exciting
Read MoreDownsizing Before Retirement
This is a tricky question to answer because it impacts your lifestyle and your family as well as your finances. So there are a number of things to consider when weighing this decision.
Read MoreHome Loan Mortgage Rates
Buying a home is usually the single most significant financial decision a person makes. With no end in sight for the predicted home loan mortgage rates rises, reviewing your home loan strategy makes a great deal of sense.
Read MoreSmall Business Insurance
There’s no doubt about it, running a small business is tough. Not only do you need to manage the business, but you need to think about the inherent risks and how you might manage those should the worst happen.
Read MoreEstate Planning For Business Owners
Whether it is a family run business, partnership, or a company structure, you need to determine how ownership and running of the business will work should you not be available.
Read MoreWhy Start A Business?
One of the key things to remember when you delve into the waters of setting up your own business, is that you are working towards future goals.
Read MoreCashflow Tips
So what can we do to manage our finances as effectively as possible in this current environment?
Read MoreFamily Business Succession Planning
One of the most important things you can do as a family business owner is succession planning. You haven’t spent years of your life building a successful business only to have it fall over when you want to retire, or are no longer able to run it.
Read MoreInvesting in Property
Owning your own home has long been known as the Great Australian Dream, but these days, investing in property seems to come a pretty close second.
Read MoreKeeping Up With The Joneses
The Keeping Up With The Joneses Mindset Can Have A Devastating Effect On Your Finances & Result In Insufficient Funds To Support You In Retirement
Read MoreGet Rich Quick Schemes
High returns usually come with high risk, so when a scheme sounds too good to be true, it probably is!
Read MoreInsurance Cover
Australia has certainly been through the wringer over the past three years. As confronting as it may be, it is essential to be prepared for the unexpected & understanding what insurance cover you need is a good start point
Read MoreQuarterly Economic Update
As bad as this might seem, Australia still has one of the lowest inflation rates among OECD nations, beaten only by Japan and Switzerland, at the bottom of the inflation table
Read MoreSaving for Retirement?
Saving for Retirement or Supporting Your Children? There are ways to do both & still ensure you have enough to retire comfortably, but it requires a little bit of planning
Read MoreWhat is Inflation?
So what is inflation? It’s a complex beast & understanding the impact it can have will help you make wiser financial decisions.
Read MoreFinancial Fraud
Personal and financial fraud is on the rise. 11% of Australians experienced some form of fraud in 2021 & losses due to investment fraud were up 119.6% compared to the same period in 2020.
Read MoreSaving For A House Deposit?
Should you invest your house deposit savings? This article investigates the pros & cons through a mini case study.
Read MoreInheritance & Movement Of Wealth
Australians pass on average $561,000 to their heirs, almost four times the global average of $148,000, with two in every three Australians planning to leave an inheritance.
Read MoreInflation & The Cash Rate
What is the Cash Rate & how will the changes applied today impact inflation and your financial situation?
Read More2022-23 Federal Budget Highlights
The Federal Government has delivered a big-spending 2022 budget, taking immediate steps to reduce cost of living pressures for working Australians while implementing a range of massive infrastructure and defense spending measures.
Read MoreWorking from Home – Tax Optimisation Opportunities
Working from home and not sure what tax optomisation opportunities may be available to you, well this short article would be worth reading
Read MoreDigital Assets – Pros & Cons For Investors
What are the advantages & disadvantages of digital assets compared with physical assets from an investors point of view?
Read MoreBNPL vs Credit Cards – Which is Best?
BNPL (Buy Now Pay Later) or Credit Cards, what do they have to offer and which is the most financially efficient approach for consumers?
Read MorePortfolio Management During Turbulent Times
There’s no doubt we continue to live in turbulent times. Between the challenges and uncertainty of the pandemic, the instability in eastern Europe & ongoing supply chain issues, effective portfolio management is a prominent topic amongst investors.
Read MoreSuper Success For Women
While women earn less and spend less time in the workforce than men, sharply eroding their super contributions throughout their working lives, there are some simple steps women can take to boost their retirement savings.
Read MoreRetirement Cashflow
Low-interest environments are great for borrowers but can be a disaster for retirees reliant on interest to provide retirement cashflow.
Read MoreStock Market Corrections
Stock Market Corrections can be an opportunity or a curse, depending on how you have set up your investments, are you taking full advantage of the opportunities?
Read MoreEthical Investing
Ethical Investing – what does this mean for you as an individual investor, what should you look for & why does it even matter?
Read MoreThe Great Resignation
What is the Great Resignation, is this a trend you should be part of & how is it impacting business owners as well as investors?
Read MoreTransitioning To Retirement?
Transitioning to retirement & not sure of the most tax-efficient method or whether a TRIS is needed?
Read MoreInvesting In Real Estate
If you are going to or are investing in Real Estate, there are a few key things to consider…
Read MoreFinancial Freedom
What is Financial Freedom, how is it different from Financial Independence and how do you achieve it?
Read MoreFinancial Literacy
One thing it’s important to understand, is being highly educated does not necessarily mean you have good financial literacy. The two do not always go hand in hand
Read MoreBull vs Bear Market
Understanding the difference between a Bull & Bear Market, combined with the opportunities they present, can help greatly when formulating an investment strategy.
Read MoreStocks And Shares – What You Need To Know
So, when it comes to stocks and shares, what do you need to know before investing? Understanding the language can be a great first step.
Read MoreWhat To Do With An Inheritance
Sometimes in life a small or not so small windfall comes our way. It can be tempting to rush out and spend it, but it is worthwhile taking the time to think about how best you can make this money work for you.
Read MoreFinancial Planning For Women
While preparing a financial plan is much the same for men and women, there are a few key things we need to factor in when developing financial plans for women.
Read MoreRetirement Planning Strategies
It may seem obvious, but lack of planning is what can lead to disappointment come your retirement party.
Read MoreIndependent Financial Advice
How do you make sure the advice you are getting is independent and perhaps more importantly transparent?
Read MoreAre Gifts Tax Deductible?
According to the Tax Office, not all gifts are created equal. Depending on the type of gift, and more specifically, to whom the gift is made, the tax implications of gift giving differ.
Read MoreWhat Are Family Trusts?
These days setting up a Family Trust Fund is not just for the wealthy. Many small business owners are using the vehicle of a Family or Discretionary Trust to protect their family from potential loss, whilst at the same time taking advantage of tax benefits.
Read MorePortfolio Reviews & Effective Approaches
So, you have a financial plan in place. You’re set. Right? Well, for a while at least. While financial experts sometimes disagree on methods or theories, there is one thing they all agree on, this is not a set-and-forget activity.
Read MoreJune Tax Preparation Tips
Tax time is one of those chores of life that nobody enjoys. It can be a real pain. Not only do you have to scramble to find all the receipts and statements you have misplaced over the course of the year, but there is often a fear that you will end up with a great big, unexpected tax bill. Or even worse – get an audit notice.
Read MoreBest Way To Begin Investing
Not sure what the best way to begin investing? For many people, the prospect of starting the investment journey is daunting. How much do I need? What should I invest in? How can I make sure I make the right decisions?
Read MoreHow To Build Your Investment Portfolio
How To Build Your Investment Portfolio – Assets, Risk & Return
Read MoreThe Compound Interest Formula
It’s likely you have likely heard this term the compound interest formula, bandied around a lot in financial circles.
Read MoreThe Impact Of Compound Interest
Almost unbelievably, the last time there was a rate rise in Australia was November 2010, when the rate went from 4.5% to 4.75%. It’s been…
Read MoreHow to be Financially Independent
We all strive for financial independence in retirement. But what if you could achieve…
Read MoreHow To Build Wealth In Your 50s
In your 50s, many people start to worry, even panic, that they have left it too late to start building the wealth they will need for their…
Read MoreHow To Start Investing – The Wealth Tank Concept
Almost unbelievably, the last time there was a rate rise in Australia was November 2010, when the rate went from 4.5% to 4.75%. It’s been…
Read More