Three Steps to Better Asset Allocation

CATEGORIES: Investment Planning

Three Steps to Better Asset Allocation
We’ve said it before, and we’ll say it again: Asset allocation is the most important decision (or set of decisions) you make about your portfolio. It’s a statement we never get tired of repeating here at Jemstep, because it never diminishes in importance.

If you’re investing for retirement, your asset allocation choices are probably the best predictor of your success. Here are three things you can do to make better asset allocation decisions.

#1: Define Your Ingredients

Asset allocation lends itself to analogies like “slicing the cake,” because you are dividing a whole (all the assets in your portfolio) into “slices” of exposure like U.S. equities or corporate investment grade bonds. It’s a useful metaphor.

But before you worry about how big each “slice” should be, consider the core ingredients. If you’ve ever baked a cake, you know that some ingredients are basic to all cakes, such as flour, sugar, butter, and eggs. Then there are the optional goodies you choose – such as chocolate frosting, vanilla flavoring, or pecan toppings.

In the same way, there are some asset classes that should be found in just about any retirement portfolio. These include liquid, large cap U.S. stocks and high quality bonds (like governments, agencies and investment grade corporate issues). There are optional types of asset classes, as well, like REITs or commodities. The recipe – how much of each “ingredient” you add – will depend on your stated goals and your risk tolerance.

#2: Build Out From The Core

You’d never apply frosting until after the cake is baked, right? Likewise, you shouldn’t worry about how much emerging market equity or high-yield bond exposure to weave in until after you’ve defined the right levels of your core assets.

That core is will change gradually over time. You’ll want a different equity/bonds split as you approach retirement. Still, its important to build a solid core that you can shift throughout your lifetime.

Populate the equity space with a few reliable asset classes along three dimensions:

1) Valuation (value / growth);
2) Capitalization (large / mid / small);
3) Location (U.S. / non-U.S.).

If you would like guidance on what funds are best for each of these asset classes,  use Jemstep Portfolio Manager. It gives you custom-tailored instructions on how to allocate your assets to maximize your money for retirement , shows you how to reduce fees and save on taxes, and helps you stay on track  by alerting you when it’s time to rebalance or make a change.

Outside the core is the periphery (the frosting on the cake). Your allocations here may change in response to cyclical opportunities and risks. These peripheral investments may amount to between 10 – 20% or so of your total portfolio value. (After all, you wouldn’t want to eat a cake that’s almost 50 percent coconut shavings, would you?)

Peripheral investments can include things like riskier equity classes, commodities and structured products. Managing the periphery requires more time and effort, so consider this when you’re “slicing” this piece.

#3: Monitor and Rebalance

keeps your asset allocation on track from year to year. You should rebalance at least once a year, bringing each asset class back to its target weight. If your peripheral “slice” tends to be on the higher end of the spectrum, you may want to make more frequent evaluations – perhaps once a quarter – to determine whether your assumptions are still valid.

Remember – it’s your retirement, and you need to make sure you are making the decisions that will give you the best opportunity to meet your goals. Regular monitoring and rebalancing are necessary ingredients for getting to where you want to be – on your first day of retirement and beyond.

Do you use a core-peripheral approach to asset allocation? Tell us what you think.

Take advantage of advanced asset allocation tools customized for you at

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About the Author

Katrina Lamb is a CFA for Jemstep. She has over 25 years experience in economics, finance, international development and management strategy, with a strong focus on global markets. She provides a voice of clarity, logic, and reason in an environment characterized by high uncertainty.

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One thought on “Three Steps to Better Asset Allocation

  1. Pingback: Create Habits to Make Good Financial Decisions | The Better Investor @Jemstep

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