Asset Allocation Plan – 7 Factors to Consider

by | Portfolio Management

Asset Allocation Plan

Asset Allocation Plan

Is it time to review your asset allocation plan? Or do you even have a plan? The answer to the first question is: Yes, you should be reviewing your asset allocation constantly. If you answered no to the second question, don’t feel bad, this is a common mistake made by many investors.

Asset allocation is how you divide your assets among investment categories. Studies indicate that up to 90% of your investment returns will be determined by your asset allocation. In other words, your asset allocation plan is the most important aspect of your investing.

A well constructed asset allocation plan can lower portfolio volatility and increase returns at the same time! That makes asset allocation more important than which individual investments you choose for diversification. You need to realize how important your asset allocation plan is and put commensurate effort into doing it right.

Many financial firms give you standard platitudes about asset allocation plans. I’m going to challenge you to think skeptically about some of their commonplace thinking. Most of them leave out important aspects, such as expenses and valuation, because it doesn’t fit the products they sell. Here are the factors that are important and my thoughts on each.

7 Factors To Consider In Your Asset Allocation Plan

1. Investment Horizon

In a general, your investments should be matched with your need for the money.  A long term investment horizon (more than 5 years) means you can invest in assets such as equities because you have time on your side. A short term investment horizon requires more stable and liquid investments.

2. Risk Tolerance

It is common for the financial industry to base your asset allocation on risk capacity, risk tolerance, and need for risk (how much return you need). This is foolishness and has caused many people to take too much risk!

What is real risk? Risk is losing your principal. Everyone should be intolerant towards losing their principal. You don’t take more risk just because you believe you need a high return. That is how you lose your money.

The best course of action to high returns is to invest more aggressively when valuations are low. The best approach to avoiding large portfolio drawdowns is to bypass over valued assets.

Successful value investors use their asset allocation plan to minimize risk by only investing when the odds are heavily in their favor. If you are interested in delving deeper into the subject, read my risk management plan for value investors post.

3. Diversification

Diversification is one of the most important investing concepts, yet is often used incorrectly. Under diversification (i.e. owing only stocks, or worse yet just one stock) can be a catastrophic error, but over diversification is a more common mistake.

If an asset category is over priced then you may need to hold more cash. You should not purchase expensive assets just for the sake of diversification. There are many disadvantages of diversification in investing.

Personally, I like to diversify my portfolio between global income, dividend growth, international growth, and aggressive growth. I will use the asset classes (i.e. stocks, bonds, cash, real estate) that offer the best opportunities based on valuation!

4. Costs / Expenses

Keeping your costs / expenses low is critical to long term success. The long term real (after inflation) return for stocks is 6.5%. A 1.5% expense ratio wipes out almost 25% of your investment returns.


100,000 investment for 30 years:

Assume return of 6.5% – 1.5% expenses =  5% growth: $446,774

Assume return of 6.5% – 0.5% expenses = 6% growth: $602,257

An extra 1% in expenses cost this investor $155,483 over 30 years on a $100,000 investment.

5. Investment Vehicles

The type of investment vehicles you choose can have a big impact on your performance and your expenses. There are many advantages to sticking with individual stocks and bonds and complementing them with a few Exchange Traded Funds (ETFs). Keeping expenses low means avoiding products with high commissions and/or high management fees.

6. Rebalancing

Portfolio rebalancing and weighting are potent risk management  strategies. Sustaining a vigilant watch over the valuations of your holdings keeps you sharp and focused on what is important. When conditions change you make the appropriate adjustments to optimize your probabilities.

7. Guidance

Most of us do better with some guidance. Even legendary investor Warren Buffet has Charlie Munger. Find an individual or service that corresponds with your philosophy and beliefs.

If you believe the ideas and strategies embraced in the AAAMP Value Blog are a fit for you, consider my premium service. Arbor Investment Planner members receive a detailed easy to follow layout of my asset allocation and are provided with specific trade alerts each time a change is made in the portfolio. Feel free to call me directly at 281-719-8904 if you have any questions.

Related Reading: 10 Investing Principles Fundamental to Successful Outcomes

Now Is Time For An Asset Allocation Plan Review

These 7 factors will provide a foundation for building an asset allocation plan that will lower portfolio volatility and increase investment returns. Now is always the best time for an asset allocation plan review.

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While Arbor Investment Planner has used reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy, reliability, or completeness of third-party information presented herein. The sole purpose of this analysis is information. Nothing presented herein is, or is intended to constitute investment advice. Consult your financial advisor before making investment decisions.

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