Making the Most of Asset Allocation

There are many reasons people decide to invest. Perhaps they want to growth their wealth, save for retirement, generate income, or leave money for loved ones when they are gone. Unfortunately, some investors and investment managers don’t understand some of the most important factors that go into determining their long-term investment results.

When it comes to maximising the chances of reaching your long-term investment goals, Fisher Investment Canada believes one of the most important considerations is long-term asset allocation—the mix of stocks, bonds, cash or other securities in your portfolio. Yet investors and investment managers may fail at times to give enough care and attention to this portfolio concern, which may lead to suboptimal investment strategies for these investors.

When determining their long-term asset allocations, investors should understand some of the most common asset classes.  Here are three common asset classes to consider when determining your long-term asset allocation:

  • Stocks—or equities—are an investment in a company for a portion of ownership.
  • Bonds—or fixed income—are a type of debt where investors provide money to a company or government for interest payments over time.
  • Cash is simple, liquid currency and is often swept into a money-market mutual fund or some other interest-bearing alternative that can be readily converted back to currency.

This long-term asset allocation decision—how much of your portfolio you should allocate to stocks, bonds, cash or other securities—is a crucial consideration when determining your investment strategy.

The 70-20-10 Model

The 70-20-10 investment model can be a useful tool when determining your long-term investment strategy. This strategy is predicated on the idea that 70% of a portfolio’s long-term performance derives from its long-term asset allocation. Once you have identified the proper allocation of assets, you can move to sub-asset allocation. The 70-20-10 model argues that roughly 20% of your portfolio performance depends on your sub-asset allocation—the mix of geographic, sector, company size or other characteristics within each asset class—and the final 10% is determined by individual security selection.

Sub-asset allocation and security selection are still important decisions. After all, security characteristic and returns can vary across an asset class. However, long-term asset allocation is a key element to achieving the financial results you would like for your investment portfolio.

Passing Through the Funnel

In practice, the 70-20-10 approach to investing works like a funnel that is equipped with some rigorous filters. Imagine that you pour all of the world’s securities—stocks, bonds, cash and any others—into this funnel. Only those that pass through the filters within the funnel make it to the bucket that is resting at the bottom. Filters begin by deciding which asset classes are poised to best help you achieve your long-term goals. Once you’ve decided which assets classes are best, you can filter down to which sub-asset classes, countries and sectors are best-suited to help you reach your goals.

This process makes the last filter—security selection—much easier. Rather than performing fundamental analysis on the entire seemingly infinite universe of investment securities, you are able to filter your potential choices to only those securities that fit each set of criteria.

Asset Allocation for the Individual Investor

Fisher Investments Canada understands no two investors are identical. So it is essential that your long-term asset allocation aligns with your personal financial goals. In order to decide your optimal asset allocation, you may need to account for factors such as growth needs, cash flow needs, age, health and potentially a spouse's circumstances as well.

Your investment time horizon—how long you need your investment portfolio to last—matters too.

You’ll need to understand your long-term financial goals in order to determine your investment time horizon. For example, if you plan to pass money on to a spouse child or other beneficiary, your investment time horizon should factor in their potential life expectancy, health and other needs.  We may be able to assist you in assessing your long term investment needs and objectives and consider whether you wish to leave a legacy. Often investors significantly underestimate their investment time horizons because simple life-expectancy tables may fall short. Also, after accounting for ongoing medical advancements, your investment time horizon could be much longer than you think. Your long-term asset allocation decision should take this potential investment time horizon into account.

Tailored Asset Allocation

Fisher Investments Canada works with qualified investors to evaluate their portfolios, asset allocations and investment strategies to help them long-term financial goals. For qualified investors with at least $500,000 of investible assets, our team first focuses on your individual portfolio goals. This step helps frame the analysis relative to what you need from your portfolio over time. We then assess your current investment portfolio’s asset allocation, diversification and fee structure. This in-depth analysis helps evaluate how your investment portfolio might meet your goals or where it might fall short.

Contact Fisher Investments Canada Today

To learn more about Fisher Investments Canada or our views about long-term investing and optimal asset allocations, contact us to request an appointment. You can also download our educational guides to learn more about proper goal setting, retirement planning and much more.

Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns.