Asset Allocation

What do we mean by Asset Allocation and why is it important?

Broadly speaking there are four main asset classes into which you can invest: cash, bonds, equities and property. As you might expect, there are also many sub–divisions within each class.

Our responsibility is to allocate your money across these different classes to obtain the best possible investment returns, in line with your personal expectations and attitude towards risk. It is not about having a knee-jerk reaction to market changes, but sticking with the underlying investment principles, if the purpose of your investment hasn’t changed. We believe that clients with well constructed portfolios are in a strong position to weather any storm and capture positive returns when the markets pick up. Underpinning this strategy is the basic principle of not placing all of your eggs in one basket.

The first question which many financial advisers ask themselves when they begin investing a client’s money is “Which fund should I choose?“. However, the consensus amongst investment experts is that getting the right asset allocation, rather than concentrating on individual fund choices, is by far the most important factor in maximising long term performance.

In fact, research has proven that more than 90% of investment performance comes from Asset Allocation, with less than 5% coming from fund selection.

Each of the Asset Classes has a different Risk and Return profile and a key aspect of the Argyle process involves our working with you to establish the ideal balance for your portfolio.

Where do investment returns come from?

asset-allocation-pie

pie_key_blue1   Asset Allocation 91.5%
pie_key_beige   Stock Selection 4.6%
pie_key_red   Market Timing 1.8%
pie_key_blue2   Other 2.1%

Source: “Determinants of Portfolio Performance II : An Update”, Financial Analysts’ Journal May/June 1991

Click here to view a text only version of this pie chart