THURSDAY, March 28, 2024
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Asset allocation: The best way to meet your long-term goals

Asset allocation: The best way to meet your long-term goals

The end of the year is coming. It's time for everyone to celebrate on weekends and get refreshed after a long and hard working year while preparing for next year. It may not be a bad idea to go through your existing investments and review their original

Importance of asset allocation

Brinson, Singer and Beebower, better known for their noteworthy contribution to finance, stated that “over 90 per cent of portfolio performance can be explained singularly by asset allocation”. These words are a key commandment for many financial planners, advisers and investors.

Many of us broadly continue to dispel notions of an asset allocation-based approach to investments. While some of us unconditionally chase returns, others use extreme caution.

Nevertheless, we are now exposed to more varied asset classes than could have been envisaged. The majority of us have had trysts with real estate, physical gold and accumulating fixed income (either through fixed deposits in banks, government or corporate bonds).

Variety doesn’t always translate into quality and while we may have been exposed to numerous asset classes, our approach to investing at times remains unstructured, often resulting in lopsided returns.

Rising disposable income levels and increasing market volatility requires one to carefully assess and evaluate each asset class. However, each one of us is unique in terms of our goals, risk appetite, patience to deal with uncertainties and ability to endure losses or enjoy gains.

Consequently, a cookie cutter approach doesn’t work for all. It’s imperative for each of us to undergo our individual risk assessment. Your financial adviser can recommend the best combination of asset classes to help meet your goals.

The level of assessment can also vary – from a simple back-of-the-envelope calculation by answering a few questions to a detailed, comprehensive financial planning exercise that includes expected cash flows and financial goals.

Asset allocation: The best way to meet your long-term goals

Identification of products that may best enable clients to capture the relevant merits and benefits of the underlying asset is also equally vital. The role of the financial adviser will be more critical as they guide and advise clients across various asset classes and product categories. This could range from vanilla offerings such as deposits and local and international equities and bonds to the more complex structured products.

Keep checking

Most investors start off with the right asset allocation, but go wrong because they do not review or rebalance it. It is equally important to continuously review the risk profile, asset allocation and product performance in order to meet your long-term goals.

Since different assets grow at different rates and your life’s goals may change, asset allocation is something that has to be reviewed on a regular basis. While sophisticated investors may review it once a quarter, you should review it at least once a year, or after a significant event has taken place.

Being undisciplined in reviewing your portfolio could lead to volatile returns, which in turn could hamper your chances of meeting your long-term goals.

In conclusion

While Brinson, Singer and Beebower may have laid the foundation for the “science” behind the phenomenon known as asset allocation, they could not have imagined the quantum of “art” required to create, execute, manage and monitor client portfolios based on this phenomenon. In an ever-growing, intricate financial market, where the only certainty seems to be volatility, asset allocation in the hands of a trusted adviser is likely to play a more prominent role than ever.

Sukit Jarutchaiwanna, the author, is Head of Managed Investments and Investment Advisory, Standard Chartered (Thai).

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