Proper Asset Allocation

Investor's Alpha:  Proper Asset Allocation

The third part of our Investor's Alpha series focuses on the importance on the proper asset allocation of an investor's portfolio.  Asset allocation is a continuous, dynamic process and not just the results of a haphazard collection of stocks, bonds, and cash.  Asset allocation should be driven by the investor and not headlines or a top mutual funds list.  Asset allocation is a process that aligns the risk of the portfolio with the tolerance of the investor. 

The key drivers of asset allocation are:

  • Return Objectives
  • Risk Tolerance
  • Time Horizon
  • Tax Situation
  • Liquidity Needs
  • Legal / Regulatory Constraints
  • Unique Circumstances

A change in asset allocation should be driven by changes in the seven inputs above and not the performance of the stock market.

Properly allocating a portfolio is an investor controlled input into the wealth equation:

Wealth = Factors You Control + Investment Returns