Strategic asset allocation can be a freedom-maker
17 October 2018 | Markets and Economy
Repeated research has found that a diversified portfolio's asset allocation is responsible for the vast majority of its variations in returns over time. It is therefore important that you get it right.
And once you set an appropriate strategic asset allocation, it should free up your time to concentrate on the other fundamentals of sound investment management.
In a way, the creation and implementation of a portfolio's strategic asset allocation, perhaps using low-cost, index-tracking funds, could be described as a freedom-maker.
With an asset allocation in place – reflecting your clients' goals, tolerance to risk and expectations for returns – you can focus more on the critical issues for investing success, such as:
- Smarter investor behaviour: Disciplined investors adhering to a strategic asset allocation should be less inclined to chase past performance, get caught up with the investment herd (who tend to buy when prices are high and sell low), and try to pick tomorrow's investment winners. The list goes on. It's worth setting aside time to think about how to help your clients become more disciplined investors who avoid emotionally-driven investment decisions, taking a long-term perspective.
- Portfolio rebalancing: This disciplined strategy involves periodically rebalancing a portfolio back to its original strategic asset allocation. Rebalancing should recapture a portfolio's intended risk-and-return characteristics. It is a smart way to periodically respond to movements in markets without being distracted by market "noise" as share prices move up and down.
- Cost control: High investment costs, including management fees, handicap real returns. And the negative impact of high fees compounds over time. Investors don't only forgo the money paid in high fees but the returns that this money may have earned over the long term.
- Tax efficiency: You can help keep your clients' returns as high as possible in a low-interest environment without taking extra risks by ensuring that your clients' investment taxes are efficiently managed.
- Retirement drawdowns: If your client is a retiree, you face the task of helping them efficiently draw down retirement savings each year to strike a balance between having a satisfactory lifestyle and making their money last as long as possible.
In short, having an appropriate strategic asset allocation in place gives you more freedom to concentrate on other matters under your control, rather than worrying about what's beyond your control. Of course, setting the right asset allocation is at the top of what's under your control.
Head of Corporate Affairs - Vanguard Investments Australia
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