Know your financial goals, then go out and invest your money

Is it growth you most want or income? Or is it to safely keep cash on hand?

Robert Blando Investments
Robert Blando

Asset allocation is a strategy for answering two basic questions:
a) What type of assets should I have in my portfolio?
b) How much of each should I have?

By following a well-formulated asset allocation strategy, you can stabilize your portfolio and increase your peace of mind at the same time.

I can’t overstate the importance of asset allocation when it comes to building a successful portfolio. Asset allocation provides you with a roadmap for selecting appropriate investments, and for rebalancing your portfolio before, during and after market volatility. It is one of the cornerstones of successful investing.

Key to outcome
The idea of asset allocation is an old one (at least as old as the saying, “Don’t put all your eggs in one basket”). But the idea really took off in the late 1980s, when investment whiz Gary Brinson, whose research in the subject has become a cornerstone of modern investment strategy, discovered in one investigation that more than 90 per cent of portfolio performance could be attributed to how assets were allocated. Slightly less than five per cent was accounted for by the actual securities held, while less than two per cent was due to market timing.

In other words, asset allocation decisions turned out to be 10 times more important than everything else put together!

Successful asset allocation begins with a simple rule: we should look for the combination of assets that gives us the greatest potential return for an appropriate level of risk.

The right asset allocation for you may not be the right allocation for me, depending on the difference in our personal risk tolerance, but the principle comes down to this: take on as much risk as you have to in order to achieve your investment goals. And no more.

You can start by asking yourself a simple question: “Given my personal risk tolerance and individual objectives, what portion of assets should I allocate for growth, what portion for income, and what portion for liquidity?” This is the secret to successful asset allocation: figure out what you are trying to accomplish with your investments, and then organize your portfolio in the way that is most likely to make those goals a reality.

Once you’ve outlined your investment objectives, you should be able to determine an appropriate asset mix. If it’s growth you’re after, you’ll want to allocate a significant amount of your wealth to equities, which have historically outpaced other assets when it comes to growth.

If your objective is income, you’ll want fixed-income investments such as bonds, preferred shares and perhaps income trusts or real estate. These investments offer the most consistent income flow. And if the goal is safety and liquidity, short-term investments such as GICs, T-bills, or money-market mutual funds will dominate.

Maintain a balance
No matter what your objective, you’ll want to reserve a portion of your portfolio for each of these main categories. Such a balance will make market volatility a lot less of a problem in your portfolio and will help you sleep better at night.

Robert W. Blando is senior wealth advisor with ScotiaMcLeod, a division of Scotia Capital Inc. He can be reached at 204-946-9223.

This column is intended as a general source of information and should not be considered as personal investment, tax or pension advice. The information, opinions and conclusions contained in the column are protected by copyright.

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