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