allocation is the process of determining the appropriate proportions
of different assets such as stocks, bonds, money market instruments
etc. to be included in an investment portfolio. Asset allocation
is an integral part of an investment strategy. The process
begins with a decision on the broad asset categories to include
in a portfolio.
The next step is to determine the exact percentage of the
portfolio to allocate to each asset category. These percentages
depend on the investor's risk tolerance, investment objectives
and expected holding period. Securities are then chosen within
each asset category and guidelines for modifying the allocation
are set up.
Studies have shown that by far the most important component
of investment portfolio performance is the proportion of debt
to equity securities. The asset allocation decision will in
some years account for as much as 90% of your portfolio's
performance. Thus, the individual securities selected are
of secondary importance.
The percentage of stocks, bonds and T-bills (asset mix) becomes
the first and foremost decision in the overall composition
of an investment portfolio. This is usually called the strategic
asset allocation decision and it means that you match your
objectives, and risk tolerance to a suitable asset mix.
For most investors, the range of appropriate asset allocation
mixes is 35/65 debt/equity for the aggressive investor to
65/35 for the conservative investor. Strategic asset allocation
today includes global diversification. Research has shown
that global diversification will substantially enhance portfolio
There are several methods and models of asset allocation in
use, based on investors' age, income level, risk tolerance
etc. An investment portfolio should be given a design that
reflects an investor's objectives and constraints based on
his/her risk tolerance and preferences.
The information contained in this commentary
is designed to provide you with general information only,
and is not intended to be comprehensive advice applicable
to the circumstances of any individual. We strongly urge you
to seek professional assistance before acting upon information