Although it’s rarely mentioned these days, you may have read some articles online or might have even heard some of the talking heads in the media throw around the term “asset allocation”. Of course, this is usually done without any explanation of what it means. So, what exactly is “asset allocation” anyway?
In a previous blog, I described what the term "Diversification" meant. It's simply the spreading of your money over different asset classes (stocks, bonds, real estate, ect.) in order to reduce your overall risk exposure. The next action that should follow portfolio diversification would be "Asset Allocation". The term refers to exactly how much or what portion / percentage of your money goes into each asset class.
Proper asset allocation depends on several factors. Factors such as your age, time horizon (how long before you plan to sell), how much money you are investing, and especially your attitudes towards money and the markets. Do you view a volatile (up and down) stock market as a dangerous place where you can lose your money? Or do you see market volatility as an opportunity to buy up more shares of good companies through a systematic monthly investing strategy?
There are various types of assets in which you can invest. Below is a brief description of each.
· Alternative Investments (Real Estate, Tax Liens, REITs, Gold and Silver, Futures Contracts, Commodities, Master Limited Partnerships, Foreign Currency, Fine Art, Antiques, Vintage Wines, and Other Collectibles)
· International Stocks (Foreign based companies – large, mid, small)
· U.S. Stocks (Domestic based companies – large, mid, small)
· Bonds (U.S. & Foreign – government, municipal, corporate, high-yield)
· Cash (cash & cash equivalents – money market funds, CDs, short-term treasuries)
Just because you may be diversified and are putting a little into each asset, doesn’t necessarily mean you have the optimal allocation for your goals. An example would be if you own the following investments: a couple well known blue-chip dividend paying stocks, a small cap growth stock mutual fund, a few highly rated bond mutual funds with different durations & weighted average maturities, some gold coins, a few pieces of fine art, and several real estate rental properties. While you seem to be fairly diversified (based on the number of assets held), your allocations may be all wrong. The real estate, art, and gold are all considered to be “Alternative Investments”, each of which have higher risk and much lower liquidity than most other assets. After analyzing the portfolio, we see that the total value (current market value) of all holdings has the Alternatives weighing in at around 80% of the total portfolio. Not only is that allocation way too aggressive, but also just how diversified are you really, if 80% of your portfolio is invested in highly speculative non-liquid assets?
Can this portfolio be ideal for some? Yes of course, but with this highly concentrated portfolio you are leaning more towards being a speculator than an investor (or at least be an investor that will have a hard time converting his/her assets to cash). And that's fine if that's what you want to do, providing you possess both the technical knowledge and skill set, as well as the capital to succeed at it. However, for most investors this allocation isn't very suitable.
An "investor risk profile questionnaire" will ask you specific questions about how you feel regarding various market scenarios. Based on your specific answers (there are no right or wrong answers), a score is tallied up and each range of numbers will give you a model portfolio that suggests how to best allocate your money. The point ranges vary depending on how many questions are asked. If for example the points range from 7 through 35, then a score of between 7-16 may point to a “Conservative” allocation, and a score of 32–35 would point to an “Aggressive Growth” allocation.
While percentages of each portfolio model may vary slightly from one investment company to another, the following are typical examples of asset allocations for various risk profiles. Keep in mind that these percentages aren't set in stone, they are simply guidelines to help you build a more suitable investment portfolio.
*Disclaimer - This is not an investment recommendation. The allocations listed below are to help educate you on what a typical investment profile may resemble.
15-20% Alternative Investments
25-30% International Stocks
55-60% U.S. Stocks
10-12% Alternative Investments
18-20% International Stocks
45-50% U.S. Stocks
20-25% Bonds &/or Index Variable Annuity
Moderate (aka "Balanced Portfolio")
6-8% Alternative Investments
12-14% International Stocks
35-40% U.S. Stocks
30-35% Bonds &/or Fixed Index Annuity
4-5% Alternative Investments
7-8% International Stocks
28% U.S. Stocks
45% Bonds &/or Fixed Index Annuity
3% Alternative Investments (Income Producing)
5% International Stocks (Dividend Paying)
12% U.S. Stocks (Dividend Paying)
40% Single Premium Immediate Annuity
20% U.S. & Foreign Bonds &/or Municipal Bonds
The most important thing is to answer the investor risk profile questionnaire honestly. Keep in mind however, the longer your time horizon the more time you have to ride out the short-term losses from market fluctuations. It’s not timing the market, it's time in the market that counts.
Malleo Financial Services takes a comprehensive approach to investing and asset management. We encompass all aspects of your total portfolio to ensure an optimal asset allocation to best match your goals and objectives.
For a free consultation, please contact us for an appointment.
*This blog is strictly the opinion of Michael A. Malleo and not those of
ASH Brokerage Corp., Quest Capital Strategies, Inc., nor any of our affiliates.
Malleo Financial Services LLC cannot and will not give any specific tax or legal advice.
Please consult your tax professional or legal professional for such advice.