Make asset allocation your personal business

One of the least understood, and most overly complex, terms is ‘asset allocation’. For many, this term is little more than an attempt to make market timing sound respectable.


Personalize your asset allocation with a combination of stocks and fixed-income securities.

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

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 spread your wealth among these asset classes, your asset allocation.

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

Liquidity lies at the heart of your choice of investment assets. After all, the ultimate 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.

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 some 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—up to 10 years 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 some 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 GICs. So when you’re working, you’ll hold more stocks 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 combinations of stocks and fixed-income securities.

This is an edited version of an article that was originally published for subscribers in the December 11, 2020, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.

Money Reporter, MPL Communications Inc.
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