When we talk about an asset allocation model, we are describing the way in which a person or entity divides their resources between different categories of assets such as stocks, funds, property, bonds, cash and so on. In particular we are talking about the actual percentage of resource in each category, for example 20% property 50% stock, 10% physical gold, 20% business interests.
It is important to have a diverse range of asset categories so that risk is minimised, for example if one asset class goes up in value (bull market) in a certain period it is probable that another will go down (bear market). However, and please note well, having a diverse range of assets will not guarantee success. You still have to make wise choices within those categories.
To this end if you do not have the experience, then start doing your homework now and let someone else help you until you feel capable yourself.
It is imperative however that this person is independently wealthy!
Is it not strange how many supposedly good financial experts are not?
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Furthermore the asset allocation model of an 80yr old would be quite different from that of a 22yr old. The former would probably include many lower risk income giving assets such as fixed income bonds or similar. His or her priority would not be capital appreciation. The latter would most likely be interested in capitial appreciation since he has his own salary or business income to rely on from month to month.
So how do you work out what the best asset allocation model is?
This very much depends on your goals and risk tolerance. Like many other areas of life you have to work out what these goals are first.
For example - I want to increase my salary by 10,000 euros per annum or I want to be a millionaire by the time I'm 45.
Then you have to decide if it is feasible to invest in lower risk bonds to reach this goal in say 5yrs....probably not...or would I have to turn up the heat a little and invest in medium to high risk investments...possibly. But even then if your asset allocation model is towards higher risk investments, that certainly doesn't guarantee your success. Too many high risk investments is a recipe for disaster.
Only you can answer this question. To this end I have listed four very broad categories which should help you decide. Please note however there is a huge range of possible models in between the four broad areas:
Asset Allocation Model 1 - Capital growth
This model, as I said above tends to be for people who have a separate income or salary and are at the beginning of their wealth building efforts. They have many years ahead of them and can make some substantial capital gains from their investments. It is likely and prudent that this type of investor will also make regular contributions to his investments from his salary or other form of income.
Asset Allocation Model 2 - Income Generation
This model tends to be for the retired person or someone who hasn't got a regular income and needs one. This type of person would depend on the income from their investments and are not so interested in capital growth. This person's objectives would be at the opposite end of the spectrum compared to our capital growth model.
Asset Allocation Model 3 - Preservation of Capital
This should only be viewed as a short term solution and is for the person who needs their money in the next 6 to 12 months - for example to pay for a house, business, fees etc. It is very important that this money is not kept in cash or its equivalent for too long. This is because there is a real danger that it will lose value in real terms due to inflation and the devaluation of your own currency.
This is more widespread than ever before mainly due to the over printing of fiat money. Fiat money is the money we now have in circulation today, it has no value to back it up ie it cannot be exchanged for gold or silver as it once could be. It has value only because government says it has.
Asset Allocation Model 4 - Balanced
This is by far the most common of asset allocation models and is basically what it says. The balanced portfolio is a compromise between income and capital growth. For many it is the best option because it gives them peace of mind. They have not been too 'extreme' in their thinking and can therefore sleep at night.
Once you have decided how you are going to allocate your assets and in what proportion it is important to re-assess once per year. There are two main reasons for this:
An asset allocation model, like other aspects of finance and wealth building is all about education. But this education must be the right one and certainly not the one that your government would like you to know about.
If you would like further information about wealth building, asset protection and lots of other important must knows then please visit our Wealth Seminars page.
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