Asset Allocation

1. Asset Allocation
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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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4. Asset Allocation Strategies
Integrated asset allocation
capital market conditions
investor’s objectives and constraints
Strategic asset allocation
constant-mix
Tactical asset allocation
mean reversion
inherently contrarian
Insured asset allocation
constant proportion portfolio insurance
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5. Integrated Asset Allocation Model
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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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