Strategic Asset Allocation
Achieving the Optimal Balance
At its heart, strategic asset allocation aims to align the balance of growth against a client's tolerance for investment risk. It also needs to match their expectations for return in the time allotted so, in the context of what is achievable for our clients, it's an extremely important matter.
After all, most people want to make as large a return as possible over the shortest possible period without the risk of losing any money and, sadly, that is simply not possible.
Risk versus Reward
Typically, there is a relatively simple formula when it comes to risk versus reward; namely, the higher the risk, the higher the potential for reward and the lower the risk, the lower the potential for reward. Introduce time into the equation, however, and things become a little more complicated.
Assets considered to feature lower risk and, hence, offer lower returns, tend to provide a higher degree of capital protection and are commonly referred to as "defensive" assets. These include cash, term deposits, government and corporate bonds.
The more risk averse a client, the more likely he or she will prefer to have a greater exposure to these assets and the greater the liquidity their portfolios will feature. Their returns, however, will be smaller.
Understanding the Risks
Growth assets feature higher returns than their defensive counterparts over the long term but with that comes more risk or greater volatility. The main assets in this class are equities or "stocks".
The investor who feels more comfortable or at ease with the higher level of risk could be rewarded with substantially higher returns over the long term although he or she may need to factor in a longer time horizon in the event of any correction in stock values so that the market has sufficient time to recover.