Asset allocation and portfolio performance: the asset allocation decision is pivotal to limiting risk and achieving adequate returns

Money Digest, Oct, 2002 by Ted Canning

The asset mix decision is of paramount importance to the long-term performance of a portfolio. All investments have some degree of risk attached to them, even if it is exposure to inflation or rising interest rates. The key to building a winning portfolio is to limit risk while simultaneously maintaining an adequate return on your investments. Asset allocation, the process of selecting the optimum mix of competing financial instruments, is a pivotal element to achieving overall portfolio performance.

History has shown that it is rare for a single asset class to be the best performer year after year. In fact, in the 1990s, the same asset class was the top performer from one year to the next only once.

Asset allocation works on a very simple principle: don't put all your eggs in one basket. The asset mix is essentially the percentage of a portfolio that is represented by equities, fixed income or cash and cash equivalents.

Asset allocation allows investors to lower the risk of staying invested and take advantage of the best performing classes. By including all asset classes in a portfolio, you ensure it will participate in the strongest performing category and you simultaneously protect the portfolio against the downside of the weakest performing one.

Although the cornerstone of asset management is the establishment of clear and concise objectives, it is essential to define your individual tolerance for risk before an asset allocation plan can be formed. The key risk factors to consider are inflation, interest rate, economic, market and specific risk.

Establishing and implementing an asset allocation and formal re-balancing strategy in a portfolio helps to eliminate the emotional swings of the market. Contact your Investment Advisor today to help you define your individual goals and objectives, and to create a pertinent asset allocation plan to help you realistically and safely achieve these goals. With a focus on the long-term, you can maximize purchasing power and enhance the real returns on your invested capital while simultaneously limiting risk effectively.

Ted Canning is a Investment Advisor with CIBC Wood Gundy (York Region, ON Branch). Phone 1-800-225-9839.