Asset Allocation
For many Canadians, a home often represents their largest single asset. Real estate however is just one of several asset classes – how you choose to diversify your various investments is referred to as asset allocation. From an investment management standpoint, asset allocation is statistically the single-most important decision in portfolio construction and is influenced by one’s goals, time horizons, risk tolerances, income and liquidity needs.
An efficient portfolio (PDF)is one which attempts to combine various investments (asset classes) in such fashion as to achieve the highest potential return given one’s stated risk tolerance. There are several forms of asset allocation:
-
Strategic
Strategic asset allocation involves apportioning savings across a benchmark asset mix policy (ex. 5% Cash, 35% bonds, 10% real estate and 50% equity.) This proportional combination of assets is based both upon one’s investment objectives and expected rates of return for the various asset classes included. Rebalancing any measurable variance back to the optimized asset mix policy has proven to be an effective measure of risk control. -
Tactical
Tactical asset allocation as the name suggests, involves adjusting one’s asset mix to take advantage of short-term investment opportunities; which may result from market, interest rate or economic fluctuations. Though tactical adjustments have the potential to increase portfolio returns, deviating from one’s strategic policy may lead to increased risk. -
Dynamic
Dynamic asset allocation refers to systematic rebalancing (by virtue of time-in-force or as a result of variance) of one’s portfolio back to a benchmark asset mix policy, and may reflect an adjustment to capital markets assumptions (expected rate of return and risk) and/or one’s investment objectives. Rebalancing serves to minimize asset mix and style drift and encourages a disciplined buy-low, sell-high mantra.
