In the past few weeks I have been reviewing some of the original articles in my own ‘basics’ section. Asset allocation is one of the most important decisions every trader needs to consider if they’re to be successful, so a chance to update my blog maybe. It’s really a question of looking at the possible options where investments can be placed and deciding what proportion to put in each one. The most common classes of asset are equities, government bonds (gilts), commercial bonds and set-interest securities, commodities such as gold and silver, property and finally, cash. Furthermore, equities can be divided into several sub-categories – large cover., mid-cap, and smaller companies, emerging markets, UK based or global.
Diversification by asset course and geography is one of the best types of risk management. As can be seen from Ben Carlson’s asset ‘quilt’, the fortunes of the various assets change from year to or which is impossible to determine that may do well in advance. Therefore, keeping a diverse mix in your allocation strategy means you capture the average from all right parts of the range. Successful investing is all about the long-term, so it is vitally important to ‘stay in the game’ for quite some time. Hence, it is important at the start of the process to find an investment process and strategy that mesh well with your personality and temperament.
This is where asset allocation comes into play. Some assets such as equities and goods are more volatile than other more stable resources such as authorities bonds (gilts). In 2003, I came very to giving up on my investing close. My stellar gains from the dotcom period before March 2000 were quickly eroded as the markets fell over the next three years. With hindsight it was clear I should have sold my investments in early 2000 and repurchased in 2003 but timing these events is nearly impossible to attain.
It was probably during this time period when I was predominantly invested in equities, that I began to understand the importance of a practical allocation of resources. It’ll therefore be considered a good idea to have a robust strategy which considers our emotional features and behavioral biases. The journey needs to be planned using a number of sound-stepping rocks and the two begin these will be some focus on asset allocation.
Selecting a plan which contains a sensible mixture of equities, bonds, and possibly property and then being assured this mix can continue through intervals of volatility and market downturns is paramount to a good final result longer term. A vintage allocation is 60% equities and 40% bonds. I am now in my early 60s and have been retired for quite some time and, as it happens, this is my current allocation.
- 10 More details of the calculation process are available upon request from the writers
- There is a busted crack house over the street
- 100 Treasury Collections†
- 59$1,299,294 $18,000 5%
- NEW Build duplexes – NorthWest San Antonio – $369K per
- Savings Calculator Chart
- 150,000 per season (simple interest, no compounding)
There is most likely no such thing as a perfect asset allocation – each individual should decide on the best mix, and of course, the blend between different classes of asset can, and probably should, vary over time. As you grow older, enough time horizon will obviously reduce so many will be looking to reduce collateral and increase bonds. One rule of thumb is to hold the same percentage of bonds as your actual age – so at age 30 years, it might be 70% equities and 30% bonds.
Tim Hale, writer of “Smarter Investing” suggests 4% in equities for each year you intend to be trading – the remainder in bonds. I would go with this suggestion but maybe for those of a more cautious disposition who need a more conventional allocation, reduce it to 2.5% or 3% for each 12 months. Another popular choice is the Harry Browne Permanent Portfolio allocation – 25% equities, 25% gilts, 25% yellow metal and 25% cash. The profile is rebalanced once per calendar year to restore any imbalance that has arisen as you asset class will better than another.
Personally, I’m not a big fan of yellow metal, but I could understand why many people will hold a substantial percentage in their stock portfolio as a hedge against money devaluation. Others respect it as the best safe haven in times of extreme doubt such as wars. One of the benefits of spreading your investments across a variety of asset classes is the reduction of volatility. If you are spent 100% in equities and there’s an unexpected downturn in the marketplaces, you could easily lose 20% or 30% of the value of your profile in an exceedingly short time period – witnesses late 2008!