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Strategic asset allocation can be a freedom-maker

17 October 2018 | Markets and Economy

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Turn your investments into a freedom-maker

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.

Robin BowermanRobin Bowerman
Head of Corporate Affairs - Vanguard Investments Australia

Investment risk information:

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested. Past performance is not a reliable indicator of future results.

Other important information:

This document is designed for use by, and is directed only at persons resident in the UK.

The material contained in this document is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so.

The information in this article does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this article when making any investment decisions.

The opinions expressed in this article are those of individual authors and may not be representative of Vanguard Asset Management, Limited.

Vanguard Asset Management, Limited only gives information on products and services and does not give investment advice based on individual circumstances. If you have any questions related to your investment decision or the suitability or appropriateness for you of any investment, please contact your financial adviser.

Issued by Vanguard Asset Management, Limited which is authorised and regulated in the UK by the Financial Conduct Authority.

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