2. What Is Asset Allocation?
A basic decision that every investor must make is how to distribute his or her
investable funds amongst the various asset classes available in the marketplace:
Stocks (e.g., Large Cap, Small Cap)
Fixed-Income (e.g., Government, Investment, High Yield)
Cash Equivalents (e.g., T-bills)
Alternative Assets (e.g., Private Equity, Hedge Funds)
Real Estate (e.g., Residential, Commercial)
The Strategic allocation is the proportion of wealth the investor decides to place in
each of these asset classes. It is sometimes also referred to as the investor’s long-
term normal allocation because it is presumed to be the “baseline” allocation that
will remain in place until the investor’s life circumstances change appreciably.
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3. Factors To Consider
Investment objective (e.g., retirement)
Time horizon for a goal (e.g., life expectancy for
retirement)
Amount of money you have to invest
Your risk tolerance and experience
Your age and net worth
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6. Strategic asset allocation
Used to develop a long-term policy allocation
Example: Portfolio will always rebalance to revert to a :
• 60% Stock
• 30% Bond
• 10% Cash allocation
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7. Tactical asset allocation
Used to develop short-term strategies to exploit changes in market
conditions
Often viewed as a contrarian strategy
Assume asset class performance is mean-reverting
if stocks have performed above average relative to bonds,
underweight stocks and overweight bonds for next period
Assume stocks will generate above average returns
overweight stocks!
Practical issues:
Frequency of rebalancing
Constraints on “swing component”
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8. Insured asset allocation
Used to develop short-term strategies to exploit changes in investor’s
objectives and constraints
This is a portfolio insurance strategy
Assumes investors become more risk-tolerant as wealth
rises
if stocks have performed above average relative to bonds, overweight
stocks for next period
Assumes investors become less risk-tolerant as wealth falls
If stocks have performed poorly, underweight in next period
Practical issues:
Frequency of rebalancing
Liquidity
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9. Major Asset Classes
Large company growth stocks
Large company value stocks
Small company growth stocks
Small company value stocks
Mid cap growth stocks
Mid cap value stocks
Foreign stocks
Developed
Emerging
Bonds
Domestic
International
Real estate (e.g., REITs)
Cash assets (e.g., Treasury bills)
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10. The Asset Allocation Process
Define goals and time horizon
Assess your risk tolerance
Identify asset mix of current portfolio
Create target portfolio (asset model)
Specific investment selection
Review and rebalance portfolio
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11. Key Considerations For Successful
Investing
Establish policies and objectives
Stick to your plan and stay focused
Educate yourself to make informed decisions
Monitor investment performance
If you need help, seek a professional advisor
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