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  • Initial Asset Allocation

    One of the most important things you need to do when starting to save for the future is to establish a good asset allocation based on your objectives and constraints (return, risk, time horizon, etc.). The initial asset allocation is called your “strategic asset allocation” and it establishes how your investments are allocated between asset classes such as Equities and Fixed Income.

    Strategic Asset Allocation

    "On average, 90 percent of the variability of returns and 100 percent of the absolute level of return is explained by asset allocation."

    Roger G. Ibbotson

  • When Market Conditions Change

    Nevertheless, the initial weight of each asset class within your portfolio will change over time depending on how the market moves. This is inevitable because different asset classes move in different directions. The percentage that you have in each asset class within your portfolio will move away from the percentages you defined at the beginning of your strategic asset allocation. This deviation from the original state may increase or decrease the level of risk for your portfolio. This could put your objectives in jeopardy and delay your investment goals.

    Strategic Asset Allocation

    Strategic Asset Allocation

    Market moves over time (Equity outperforms Fixed Income)

    Equity vs. Fixed Income

    Current Asset Allocation

    Current Asset Allocation
  • Portfolio Gets Rebalanced

    The method of adjusting your portfolio back to its original state in order to maintain the original mandate of risk and return objectives is called portfolio rebalancing. The process involves selling your winners and buying your losers. This may sound counterintuitive to most investors but makes sense if you want to stick with your plan and control the risk to your portfolio regardless of what the market does. In addition, if you believe markets oscillate over time and they revert to the mean, rebalancing your portfolio will allow you to sell high and buy low. This is an unintended, positive consequence of bringing your portfolio back to its original strategic asset allocation.

    Before rebalancing - Current Asset Allocation

    Current Asset Allocation

    ( - ) Selling your best performing assets (Equity)

    ( + ) Buying your worst performing assets (Fixed Income)

    After rebalancing - Strategic Asset Allocation

    Strategic Asset Allocation
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