Saturday, 26 January 2013

Investment planning - asset allocation

Once you understand your free cash flow, you need to determine where to invest it.  Keeping it under your mattress is not likely to be the best option if you want to see the balance grow over time.  While it’s easy to jump straight into product selection (should I buy Westpac or CBA shares?), it’s important to start with your overall asset allocation. 

One of the figures I remember from my financial planning course was that 90% of the overall performance of your portfolio over time is determined by your asset allocation – i.e., what percentage of your portfolio was invested in cash, fixed interest, property, domestic shares, international shares, etc. and when.  Only 10% depends on the actual products selected.

So today, I’m going to discuss some of the key aspects of asset allocation:
  • Investment asset classes
  • Historical performance of different asset classes
  • Performance v. risk
  • Diversification
  • Alignment to risk profile

Investment asset classes

Each of the main asset classes is outlined below, along with their indicative level of risk and return.