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News
Asset allocation is the key to successful investment planning
Asset allocation took a beating in 2007 and 2008, largely because investors found they seemed to be losing money no matter what securities they favoured. That has led to doubt about its worth, so it is useful to take another look at this approach to investment portfolio design in the light of the past two years' performance.
Asset allocation is based on the theory that the choice of assets you invest in will have the biggest impact on the level of returns you make - rather than the individual funds selected. Research by Paul Merriman supports the view that a very high proportion of investment returns come from the choice of underlying assets.
The first step in the investment planning process is to assess your risk profile, followed by recommending how your investments should be deployed across the main asset classes. Then individual funds are selected to fine tune the portfolio - the reverse of the traditional approach.
The idea is that different asset classes normally move in broadly different ways. In theory, you can increase performance and smooth out the ups and downs of an investment portfolio by combining different asset classes - described as 'diversification'.
The numbers show that the model largely held up in the market mayhem of 2007,2008 and so far in 2009, although there have been times when all main asset classes fell together. In 2004, 2005 and 2006, property was the best performing asset by far, followed by shares, and fixed-interest securities were the laggard - although all three made positive returns for investors. 2007 and 2008 saw that order reversed, with property posting losses while fixedinterest securities and shares made very small gains. So far in 2009, the trend of 2004-2006 has been restored.' This demonstrates that no one asset class is always a winner and that over time, diversifying really can smooth out returns.
Your risk profile assesses how much risk you can afford. With this established, asset allocation can be optimised. Those with higher risk profiles can look to riskier strategies, such as commodities or hedge funds. Remember, with all asset classes, the value of your investments and the income from them can go down as well as up; you may not get back the amounts you have invested and past performance is not a guide to future performance. It is important that you take expert advice before making any investment.
Asset allocation took a beating in 2007 and 2008, largely because investors found they seemed to be losing money no matter what securities they favoured. That has led to doubt about its worth, so it is useful to take another look at this approach to investment portfolio design in the light of the past two years' performance.
Asset allocation is based on the theory that the choice of assets you invest in will have the biggest impact on the level of returns you make - rather than the individual funds selected. Research by Paul Merriman supports the view that a very high proportion of investment returns come from the choice of underlying assets. The first step in the investment planning process is to assess your risk profile, followed by recommending how your investments should be deployed across the main asset classes. Then individual funds are selected to fine tune the portfolio - the reverse of the traditional approach.
The idea is that different asset classes normally move in broadly different ways. In theory, you can increase performance and smooth out the ups and downs of an investment portfolio by combining different asset classes - described as 'diversification'.
The numbers show that the model largely held up in the market mayhem of 2007,2008 and so far in 2009, although there have been times when all main asset classes fell together. In 2004, 2005 and 2006, property was the best performing asset by far, followed by shares, and fixed-interest securities were the laggard - although all three made positive returns for investors. 2007 and 2008 saw that order reversed, with property posting losses while fixedinterest securities and shares made very small gains. So far in 2009, the trend of 2004-2006 has been restored.' This demonstrates that no one asset class is always a winner and that over time, diversifying really can smooth out returns.
Your risk profile assesses how much risk you can afford. With this established, asset allocation can be optimised. Those with higher risk profiles can look to riskier strategies, such as commodities or hedge funds. Remember, with all asset classes, the value of your investments and the income from them can go down as well as up; you may not get back the amounts you have invested and past performance is not a guide to future performance. It is important that you take expert advice before making any investment.