Understanding Asset Allocation – and Why It Matters

At PAS Financial Planning we specialise in providing investment, retirement and estate planning solutions for our valued clients and we are here to provide guidance, counsel and direction to aid you in achieving your financial objectives.

However, we also consider it is important that our clients have a basic understanding of the fundamental investment principles so that they are able to understand the value of our advice process – and when it comes to investment principles, ‘Asset Allocation’ is undoubtedly a key factor in providing a solid foundation which will assist you in achieving your long-term financial goals.

Asset Allocation is the process of attributing proportions of your investment between the various asset classes such as cash, equities, fixed interest and property.

The objective of this process is to provide diversification of your portfolio, linked to the level of risk you are prepared to take so as to appropriately balance risk versus reward.

The basis of any investment strategy is an appropriate asset allocation, taking into account both an individual’s investment objectives and their attitude to investment risk.

Stochastic modelling, i.e. using statistics subject to probabilistic behaviour, uses historical data and probability to forecast the likely range of returns over different timeframes that can be achieved by varying combinations of assets.

This is often combined with ‘Strategic’ and ‘Tactical’ asset allocation – a method through which an actuary takes a more active approach, attempting to evaluate the expected performance of the asset classes that are likely to outperform in the forthcoming period of time.

To further aid your understanding of this process it is also important to consider that as well as diversifying risk between asset classes, it is also possible to provide extended diversification within each asset class.

For example, equities and fixed interest are separate asset classes. However, when investing in equities an investor can diversify further by investing into UK equities, European equities and Emerging Markets equities amongst a broad range of other alternatives. When investing in fixed interest securities, an investor may invest within Government Bonds (Gilts) and Corporate Bonds.

This would allow an individual to achieve exposure to several geographical markets amongst the global economy. Similarly, an investor can apportion their investment within large companies and/or small companies and this, in turn, provides further diversification.

By diversifying your investments across a number of asset classes, it becomes possible to construct a portfolio of investments to match your risk profile and this is the aim of PAS Financial Planning as part of our ongoing service to our clients.

We first assess your desired tolerance to risk using a set of hypothetical questions and once an appropriate risk profile has been determined and agreed we then utilise the expertise of our actuarial partners to determine a suitable asset allocation for your agreed risk profile.

Our actuarial support use broad diversification, distinctive, independent research and progressive risk management and apply this to a number of portfolios that span the risk spectrum.

PAS Financial Planning outsource investment fund selection so that diversified portfolios are then created using a research-driven process supported by independent fund analysis that complies with the asset allocation outlined by the actuaries.

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