| 9 Lowell Street, Beverly, Massachusetts, 0915-3652 - Phone 978.922.9961 - Fax 978.922-9961 Conflict Free Financial Planning, Investment Counseling & Financial Education |
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| Asset Allocation |
| Philosophy |
Asset Allocation
The asset allocation decision is the most important decision an investor makes in building an investment
portfolio because it represents the investor’s desired trade-off between risk and return. An investor who desires
a higher return must expose a greater portion of his portfolio to stocks and the short term volatility that
accompany them. Investors who wish to avoid volatility must lower their exposure to stocks and accept lower
returns. It’s that simple. You cannot expect to buy only stocks that go up and avoid stocks that are likely to go
down nor is it possible to consistently buy low and sell high. The only way to control risk in an investment
portfolio is by controlling its exposure to stocks.
Numerous academic and industry studies suggest that the asset allocation decision is responsible for over 90%
of a portfolios investment return. A portfolios exposure to stocks has a greater influence on long term returns
than picking the best stocks and bonds or trying to time the market. Security selection and market timing have
been found to lower returns.
If asset allocation is the most important decision when building an investment portfolio how does one determine
the most appropriate asset allocation for an individual investor? There are three variables in determining the
most appropriate asset allocation for an individual. They are:
1. The return an individual requires to reach their goal: The higher the return required by an investor the more
stocks should be included in the portfolio.
2. The investors time horizon: A diversified portfolio of stocks is most risky over the short term. As the length of
time an investor holds a portfolio of stocks increases the risk of loss decreases and the chances they will
earn the long term return of stocks increases. Investors who will not need their money for long periods of time
should invest more in stocks than investors who have shorter holding periods. See time based diversification
for more on this topic.
3. An investor’s risk profile: Investors with long holding periods who are not comfortable with short term volatility
may panic and sell their stocks if they temporarily lose value over the short term. A diversified portfolio of
stocks has never lost value over fifteen year periods yet some people may not have the patience or
temperament to allow their portfolio to recover from a short term loss. These people should invest a lower
percentage of their portfolio in stocks.
We will work with you to develop an asset allocation that is most appropriate for your needs given these three
variables.
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| 9 Lowell Street, Beverly, Massachusetts, 01915-3652 - Phone 978.922.9961 - Fax 978.922.9961 Conflict Free Financial Planning, Investment Counseling & Financial Education Adam Smith David Ricardo |
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| Copyright © 2009 Thomas J. Costantini, Monserrat Advisory Services, LLC, All Rights Reserved. |