Asset Allocation

Asset Allocation
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Some assets are highly correlated and move in similar ways according to different market conditions. Obviously, an investor investing in shares in four banks is only slightly more diversified than an investor with shares in one bank. So, even for an investor holding just shares, the first step is to invest in a spread of different companies. Opinions differ, but 20-30 or more shares are suggested as a minimum number to obtain some degree of spread.

Investing overseas will help, as different countries have different economic cycles and, indeed, currencies, but with the advent of globalisation many markets will move in similar ways. To obtain real benefits from diversification, completely different types of assets should be chosen where historically their movements have not been correlated or which show some negative correlation.; for example, where share markets go down, fixed interest markets usually go up. The wider the spread of uncorrelated assets the more robust will be the performance in different economic conditions.

Most studies of investors have concluded that people are more concerned about high losses in the bad times than they are with making high gains in the good times. Therefore, most wealth managers are talking to clients about diversification as a way of taking the edge of any market corrections.

The type of asset that could be included in a portfolio for a wealth investor is indeed diverse and no doubt this book will serve as an introduction for some readers to some investment areas they had never previously considered. The spread of assets is an important area. There are still some very respectable investment groups that asset-allocate only into shares and fixed interest securities. Whilst this may provide a better spread than just using a single asset class, it is hardly a diversified portfolio. For some investors, even when investing in collective investment companies as unit trusts, investment trusts or open-ended investment companies (OEICs) which are typically suitable for portfolios up to £200,000-250,000, we would typically split investments according to the clients risk profile across the following asset areas:

* Cash
* Fixed interest securities
* Share-based funds in the UK, Europe, North America, the Far East, Japan and emerging markets
* Property funds (typically based on commercial property)
* Commodity funds.

The availability of fund supermarkets that act as an administration platform and give access to a wide range of funds from many different managers allows a diversified portfolio to be created for small values, so that even a single Maxi ISA can have a spread of funds. This is a welcome departure from the historical sales of investments such as PEPs (personal equity plans) and ISA’s (individuals savings accounts) where investors were sold the current flavor of the month fund. As a result we continue to see many investors with disappointing PEPs and ISAs because they were sold technology funds or European funds and either the sector, in the case of Technology, or the fund in the case of Europe etc, has been very disappointing.

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