Asset Allocation

Reducing risk in your investment portfolio via diversification

Fundamentally, the wealth management process is about increasing, or at the very least, maintaining the purchasing power of your assets. Appropriate investment and risk management tools and strategies can boost your benefits in the good times, and help reduce the fallout from a market downturn.

The best known and proven risk management tool is diversification. Diversification is achieved through strategic asset allocation. Historical data has shown that, over the long term, certain asset classes will move fairly consistently with other asset classes in response to general economic circumstances - this is commonly called correlation. Assets with similar risk and return attributes are generally grouped together to form asset classes. We know that equity and fixed interest investments have a low correlation in potential returns - they act like long term married couples rather than newly weds. Therefore a fall in interest rates will generally be accompanied by a rise in the value of equities. Strategic asset allocation is about combining asset classes with contradictory correlations to assist in smoothing out the risk of the overall portfolio.

Studies have shown that strategic asset allocation will be the largest contributor to portfolio return and it will capture the market return for the portfolio as a whole.