What is asset allocation and why does it matter?

You may have heard the term asset allocation before and wondered whether it affects your portfolio or investment strategy. The following article will outline the importance of understanding and maintaining your asset allocation throughout your financial journey.

What is asset allocation?

Asset allocation can be understood as an ‘investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance and investment horizon.’ There are a range of different asset classes including cash, equities (both domestic and international), as well as fixed income which can also be separated according to whether they are on domestic or international markets. Each of these asset classes has varying levels of risk and therefore will perform differently over time.

What’s the point of asset allocation?

There is no one size fits all in terms of asset allocations as every investor has a different risk appetite and financial position. Despite this, determining your asset allocation is a foundational decision that will affect your investment journey. How you choose your assets to be allocated or diversified will play a large part in the investment returns you receive. Therefore, it is important to have a good understanding of your financial goals and objectives over the short, medium and long term. This will assist you in deciding the level of risk that is appropriate for you to achieve these goals. In addition to this, it is crucial that investors truly understand the level of risk they are willing to take on and should focus on how they feel when investing and not what other investors are doing. This will help to ensure that your investment decisions align with your personal ethos, financial position as well as your objectives.

Asset allocation is also a very important tool that assists investors to ensure they have a diverse range of assets. Basically, helping investors not to put all their eggs in one basket. This will assist in minimising risk and maximizing returns over the long term.

What is an asset allocation made up of?

Asset allocations may be comprised of the following:

  • Domestic equities – if you are located in Australia there is the ability to allocate a portion of your investment to Australian growth assets such as shares, ETFs and managed funds
  • International equities – there is also the potential to allocate your portfolio to shares, ETFs and managed funds located on other markets across the globe
  • International fixed interest – if you would like to invest in fixed income or defensive assets you can do this by increasing your exposure to international fixed interest
  • Domestic fixed interest – similarly, if you would like to invest in defensive assets on local markets you may choose to invest in government or corporate bonds in Australia
  • Property (int. or domestic) – you may wish to have a portion of your assets allocated to property which can be domestic or international
  • Other/alternatives – some investments may not fall into the aforementioned categories and therefore constitute other or alternative assets

How should I allocate my assets?

When devising the most appropriate asset allocation for you it is important to keep in mind the following considerations:

  1. Time Horizon – how long is your investment time horizon?

This should be based on your short-, medium- and long-term goals which will determine when you will need particular funds by and therefore your investment time horizon.

  1. Risk tolerance – how much risk are you willing to take?

Your risk tolerance or appetite will also be contingent on your goals and whether you have the time to take on more risk or whether it is more appropriate for you to have greater exposure to defensive assets. Therefore, reinforcing the importance of having a clear and accurate idea of your objectives and their timeframes. An investor who wishes to take on more risk will skew their asset allocation in favour of growth or aggressive assets, whereas an investor who wishes to take on less risk will have a greater allocation of defensive or fixed-income assets.

  1. Financial position and circumstances

Another consideration that investors should take into account is their current financial position and circumstances. This is also linked to an investor’s goals and is important that investors have an asset allocation that does not jeopardize day-to-day income and expenditure such as debt repayments and living expenses.

Clients of EPG Wealth are provided with a comprehensive asset allocation breakdown based on their goals and objectives, financial circumstances and risk appetite. They also receive from two up to six asset allocation checks every year to ensure that their portfolio remains invested as per their agreed level of risks.

If you would like further assistance in understanding your risk appetite and the appropriate asset allocation for you, please click the link to organise a 20-minute complimentary consultation with an EPG Wealth adviser.




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