Dashboard Dissected: Part 3- Asset Allocation

Monday, June 28th, 2010 by Charles Mayfield, CFP®


In keeping with the mindset that an Investment Dashboard should be a turnkey tool, providing all the relevant information pertinent to making sound decisions for a client’s portfolio, it only makes sense to include a page that clearly illustrates the Asset Allocation for all the client’s holdings.  The concept of diversification goes back to the old proverb “don’t put all your eggs in one basket.”  There is nowhere that this concept has more bearing than in your investment portfolio.

Diversification is the central tenet of asset allocation, proposing that by combining multiple assets with varying correlations (moving independently of each other), one can reduce overall volatility and risk.  To determine the appropriate allocation for each of our clients, we take into account factors specific to the investor’s unique financial situation as well as financial market and economic factors that could affect a particular sector, asset class or type.
In the end, sustainable withdrawals are the goal.  It is realistic to think that an investor can live well into his/her 80’s nowadays.  Advances in modern medicine have made it increasingly difficult to have enough money to last until you die.  The longer money is needed, the more care that should be taken to hedge investments against inflation.  For any investor, we recommend a strategic allocation with the following parameters:

  • 10-15% allocated to Alternative Investments – these are ‘non-traditional’ investments that have little to no correlation to the equity or bond markets.  Alternatives tend to provide much needed protection during Bear markets.
  • Of the remaining Balance (after Alternatives)-60-75% allocated to Equities – effectively, you end up with an approximate total allocation to equities of 55-70% exposure. Equities will be spread among numerous styles and market caps (Large Cap, Mid Cap, Small Cap, Foreign, Emerging Markets, etc.).
  • Of the remaining Balance (after Alternatives)-25-40% allocated to Bonds – this puts your effective Bond exposure somewhere between 20-35%. These funds are allocated to various bond holdings (Corporates, High Yield, Treasuries, Municipals, etc.).

(Above is a hypothetical example for illustrative purposes only)

Historically, this allocation gives the client a greater probability of sustaining their ability to withdraw money over time and steadily increase their withdrawals to keep pace with inflation.  It should be noted that we employ this strategy across our entire client base. You should expect a similar allocation regardless of your age.  Being too safe can drastically affect the long-term sustainability of wealth in the same manner that being too risky can bring about too much volatility when taking withdrawals.

By graphically showing our clients the asset allocation each quarter, we can easily ensure that they understand how their different positions work together to mitigate risk.  An investor’s asset allocation will fluctuate over time due to market movements and individual investment performance.  The Dashboard gives us a breakdown of the current allocation and allows us to quickly determine how weights may have shifted.  Reallocations within the portfolio are sometimes necessary to maintain the proper mix established for a client based on their risk tolerance and ever-changing financial picture.

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