ASSET
IMPORTANCE
OF ASSET ALLOCATION
Many
mutual funds invest primarily in one or two asset “styles”. Fund managers
measure their performance against a “benchmark” index for that style.
Contrary to what some investors may believe, this does not translate into the
fund manager protecting an investor’s portfolio. For investors, asset
allocation and low expenses are of primary importance. In a 1991
study, Gary D. Benson et al determined that the asset allocation determines
91% of investment results. Mutual fund managers’ ”stock-picking”
contributes very little (5%) to the overall results of a diversified portfolio.
This means that your investment success, and along with it, perhaps the success
of your retirement or other savings goals, are primarily determined by your own
intended or unintentional choices of asset diversification and asset allocation.
CONTROLLING RISK
“Risk”
can be defined as the possibility things will turn out worse than you expected. The types of
investments and the degree of diversification within a portfolio heavily
influence investment risk. Bringing together different types of investments that
are unrelated to each other reduces risk. The proportion of the portfolio
allocated to each type of asset determines the risk characteristics of the
portfolio as a whole.
LFM&P
SERVICES
LFM&P
helps you by first understanding why you are investing, what your goals are, and
when you will need to draw upon your savings. Since all investments have a
chance of losing money, at least temporarily, we discuss how comfortable you are
with this possibility (your "risk tolerance"). We will help
you to define an investment strategy that is consistent with your goals and risk
tolerance. The second result will be recommendations about how to diversify
among different types of assets, and what the best allocation is for your
individual goals and comfort.
If
you would also like help selecting investments to achieve the recommended
strategy and allocation, please consider LFM&P’s investment
management
services.