November 2007
 

Asset Allocation - the Investor's Plumb Line

by Arthur Childs, Chartered Financial Planner

The principles of diversification to reduce the overall volatility and therefore risk of a portfolio, suggest that investors should aim to spread their investments.  Different types of investments react to economic and financial conditions in different ways, smoothing out the fluctuations.  For example, cash retains its nominal value when equity markets fall, and fixed interest securities appreciate when interest rates drop.

“All too many investors thought they were diversified in the late 1990s because they owned 39 ‘different’ internet stocks, or seven ‘different’ US growth stock funds.  But that’s like thinking that an all soprano chorus can handle singing ‘Old Man River’ better than a soprano soloist can.  No matter how many sopranos you add, that chorus will never be able to nail down all those low notes until some baritones [we think he meant bases] join the group.  Likewise, if all your holdings go up and down together, you lack the investing harmony that true diversification brings.”


Jason Zweig in his commentary on The Intelligent Investor

Various academic studies have shown that asset allocation is the single most important factor in determining the returns of an investment portfolio.  Secondary factors like fund selection or market timing are less important when compared to being in the right asset class (or mix of asset classes) at the right time.

Asset Allocation Tool

We currently use an asset allocation tool that has been supplied by threesixty services LLP and prepared with consulting actuaries, AKG.  What AKG has done is to design some clear definitions of risk which they believe most clients will be able to understand. These definitions are available for clients to read and decide which most closely matches their attitude to risk for the specific investment under consideration.

Our current fact find includes the AKG risk questionnaire and clients completing it will be asked to initial the appropriate definition. The questionnaire provides two boxes for this purpose.  One is for terms of up to 10 years while the other is for more long term investments. AKG has provided model asset allocation portfolios for each definition and each term. 

The AKG asset allocation tool acts as a good ‘plumb line’ for us when recommending funds to form part of a client’s investment portfolio.

The AKG asset allocation tool allows us as advisers to test that a new or an existing investment portfolio is going to do the job that is expected of it based on the client’s attitude to risk requirements, the aim of their portfolio, the investment term and the other assets they hold outside of the portfolio.

We have created a new section of our website dealing with asset allocation. For further information please visit our website at www.arch-fp.co.uk/asset_allocation.php

Please note that this information does not constitute personal advice and should not be treated as a substitute for specific advice based on your circumstances.  If you are in any doubt as to whether the asset allocation of your investment portfolio is the right one for you, then you should discuss the matter with a suitably qualified independent financial adviser such as ourselves.

If you would like to discuss the asset allocation of your investment portfolio please ask your usual Arch adviser, telephone 0845 3700 661 or email enquiries@arch-fp.co.uk.

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Arch Financial Planning Limited, Arch House, Collins Court, 39 High Street, Cranleigh, Surrey GU6 8AS
Tel: 0845 3700 661, Fax: 0845 3700 662

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