Determine your own asset allocation

The investment industry has its jargon. One of the least understood, and overly complex phrases, is ‘asset allocation’. For many advisers, it’s just an attempt to make market timing sound respectable.

Asset allocation should be your personal business. No mutual-fund portfolio manager can do it for your individual needs.

Asset allocation

Personalize your own asset allocation with a mix of equities or equity funds and fixed-income securities.

Investment professionals think of your assets as your investment possessions. They can include cash, stocks, bonds, real estate, commodities and perhaps art or collectibles. And they call how you choose to spread your wealth among these asset classes your asset allocation.

The claim has often been made by many in the industry that asset allocation determines the bulk of your investment returns. For our part, we think that’s a fancy way of saying if you buy the right things, you’ll do well. Not a profound statement.

Liquidity is central to your choice of investment assets. After all, the goal of your investment program is to provide cash when you need it. Since many asset classes have no fixed rate of return, you should hold enough fixed-income securities, with appropriate terms to maturity, to meet your liquidity needs.

Balanced funds time the market

Most asset allocation funds are really balanced funds. That is, they hold some stocks, some bonds and some cash. Many restrict the manager to ranges for these assets. For example, a fund may limit itself to no less than 40 per cent and no more than 60 per cent in either stocks or bonds.

The manager will adjust the portfolio within these limits, trying to hold bonds when interest rates are either high or falling, and stocks when they do well. That sounds like market timing.

Some funds distinguish between strategic and tactical asset allocation. That refers to the speed with which the manager makes adjustments among asset classes.

Strategic asset allocators move slowly and with less change when they do move. Tactical asset allocators move much more quickly—in effect trading among asset classes rather than investing in stocks and bonds.

Control your own asset allocation

All these types of funds hold some stocks, some bonds and some cash. But they offer you no control over your own asset allocation. When your liquidity needs change, you can’t expect these funds to change to suit your changing needs. And if you generate cash by redeeming units of a balanced fund, you’ll be, in effect, redeeming stocks and some fixed-income investments—not always a timely thing to do.

We recommend preparing for your cash needs with fixed-income securities for at least the next five years, 10 if you’re retired. That way, volatility in your equity investments won’t force you to sell at a poor time.

If you’re employed and saving for a future goal, you won’t need current income. If you’re retired, you’ll want your income supplied in the shorter term by reliable investments such as a well-planned program of bonds or GICs. So when you’re working you hold more equities and fewer fixed-income securities. In retirement, you may want the opposite.

But as for asset allocation, or balanced funds, we think you’ll do better to personalize your asset allocation with a mix of equities, or equity funds, and fixed-income securities.

This is an edited version of an article that was originally published for subscribers in the February 22, 2019, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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