Asset allocation explained

asset allocation 2 150x150 Asset allocation explainedThe allocation of your money to different types of investment assets, generally referred to as “asset allocation”, is the major factor that determines the risk level and performance of an investment portfolio as a whole.

For example, if you have all of your money in cash you have a low risk but relatively low returns. At the other extreme, if it is all invested in shares in Asian stock markets you may, over time, receive a much higher return but with a very much higher risk of experiencing negative returns – and stress – along the way.

Designing an individual’s asset allocation is very much like designing a piece of machinery. We know that different types of investment will provide certain average performances over lengthy periods. We also have a good idea of the probability of negative returns for investment types.

It is also a fact that different types of investment will perform better one year than the next. By allocating assets into certain combinations of investment types we can estimate the likely return over longer periods, and the risk of having a negative return in any one year. This is why each person needs to have their own asset allocation to suit his or her personal objectives and risk tolerance.

An example to make it easier to understand…

Chris is close to retirement and is becoming very conservative and cautious in his outlook. His asset allocation might look like this:

Cash                               10%

Property                         10%

Australian Shares            25%

International Shares         15%

Bonds                            40%

However, Travis is only 25. He has nearly 40 more years to retirement and just wants to see a maximum return on his money, while being happy to accept negative returns some years. His portfolio is illustrated below:

Cash                               5%

Property                         10%

Australian Shares            55%

International Shares         25%

Bonds                            5%

From these examples, we not only see different risk profiles but also allocations to higher income producing investments for Chris, who is nearing retirement.

As goals and attitudes differ greatly from one person to another, it is important your portfolio asset allocations are personally designed. Talk to a licensed financial adviser on (07) 3040 4840 who has expertise in this area.


Disclaimer:

The advice on this site may not be suitable to you because it contains general information that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information.  Please also refer to our general advice warning under contact us tab on our website.  The article is based on information available at the time of writing only and therefore care should be taken as to the accuracy of the content.

Image courtesy of [ pakorn] at FreeDigitalPhotos.net

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