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A novel way to determine your asset allocation

by , 25 May 2015

Asset allocation involves the spread of your investment capital across a wide array of different assets.

By doing this you hope they perform slightly differently to one another. This evens out investment performance over time and reduces your risk.

But how else can you go about asset allocation?

Read on to find out…

How ‘classic’ asset allocation works

The simplest form of asset allocation involves splitting your portfolio between shares and bonds. Say 60% in shares and 40% in bonds. This type of asset allocation has done well over the past 100 century.

Over time, shares have done a lot better than bonds, but they’re three times more risky. So by following this split, you still benefit from the good returns shares offer, but with lower risk.

But it doesn’t always work out.

Firstly, you don’t have 100 years to sit it out and see if this asset allocation works. And secondly, you’ll probably end up buying into some overpriced shares at some point and this will erode your returns.

So what else could you consider?

You could look at opportunistic allocation

This type of asset allocation is very different to ‘classic’ allocation. It means sitting on a lot of cash until a fantastic opportunity comes along, Dr Steve Sjuggerud in Daily Wealth explains.

It doesn’t matter which asset the opportunity belongs to, it just needs to be offering a good buying opportunity.

To follow this type of asset allocation, you need to think a bit differently. Instead of sticking to set percentages in different assets, you ask yourself questions like:

  • What’s your risk investing in this particular asset?
  • What’s your potential reward for investing in this particular asset?

But be warned, this type of asset allocation can go wrong. It means you’re not diversifying your portfolio. You could end up very overweight in one asset.

It essence, it goes against all the principles of asset allocation. If opportunistic allocation is something that interests you, ensure you have experience with investments and can effectively manage your investment risk.

You could think about including it as part of your asset allocation strategy.

So there you have it. A novel way to determine your asset allocation.

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A novel way to determine your asset allocation
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