Asset Allocation Is Critical

11/30/2007 12:00 am EST


Chris Gilchrist

Editor, The IRS Report

Chris Gilchrist, editorial director of, led a panel discussion of advisers and experts discussing the key role of asset allocation for investors.

Watch the complete workshop here...

Chris Gilchrist opened the panel discussion by defining asset allocation as the division of investment assets among several different asset classes. Asset allocation is a key strategy often ignored by many investors, yet it is crucial as this strategy-if executed correctly-can give your portfolio the same (or better) return at a lower level of risk.

The basic group of assets owned by investors includes cash, equity, and property (residential and commercial). Their behavior can be predicted, i.e., the lower volatility and returns of bonds as opposed to equities. Therefore, combining them gives you more bang for your buck. And the more asset classes you have, generally, the more efficient you can make your portfolio.

The big decision for most investors is how much should you have in each type of asset? And that will depend on your personal risk tolerance. In other words, what level of risk allows you to sleep at night?

Ian Shipway, director of investment, Thinc Wealth Management, advised investors to look for sufficient liquidity, divide their portfolio between immediate and future money, and place the balance into assets in which they can tolerate the ups and downs. The level of risk investors can tolerate will drive the amount in each asset class. Investors need to balance out their risk tolerance against their capacity for risk (how much do you need to take to get the returns needed to live your lifestyle?). He also emphasized that you need to rebalance your portfolio continually. 

His company's strategy is to use more passively managed funds, such as index funds, which help reduce expenses and give his clients a wider selection.

Donna Bradshaw, financial planning strategist, IFG Group PLC, agreed, noting also that investors' capacity for risk may change over their lifetimes, so they should make sure to rebalance with that in mind. She avoids market timing and prefers to put her clients into actively managed funds that are run by stock pickers who utilize rigorous research.

Peter Lucas, director and global strategist, Ashburton (Jersey) Limited, is a fund manager who believes in using market timing as an asset allocation tool. He cited, as an example, the 1980s, when everyone thought investing in Japan was great idea, but it actually was a great opportunity to exit and avoid it for a long time. He added that perhaps now is the time to reallocate money to that country. With the pound at its most overvalued level in 30 years, he considers it an opportune time for UK investors to invest in foreign currencies. And investors should remember that sometimes cash is the best investment to be in.

Gilchrist told attendees that rebalancing is important; otherwise equities often become a bigger portion of your portfolio, resulting in a higher level of risk. He also noted that the more volatile the market is, the more active your asset allocation should be.

One attendee asked about maintaining their commercial property investments in the UK. Lucas replied that commercial, as well as residential, properties in the UK were probably near their peak, so he would only be considering unique investments there. However, he commented that his firm is looking for Asian property investments right now, because of those countries' undervalued currencies and growth prospects.

Shipway agreed that the yield on commercial properties is quite rich right now and capital values are at risk. Although he wouldn't buy physical property right now, he might want to hold an open-ended investment fund.

Each panelist also discussed the benefits of alternative asset classes, noting that commodities are the current flavor of the month. Lucas's firm has been investing in that highly volatile sector and is looking for buying opportunities at lower levels. He also is investing in funds of funds in hedge funds, and Bradshaw's firm is considering those, too. Lucas remarked that while many asset classes were currently overvalued, he believes that equities look like the last major asset class that is undervalued on a relative basis.

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