The importance of Asset Allocation seems to have been ignored by investors in recent years, and many are “hooked” on their favourite asset class, be it shares, property or to a lesser extent, bonds.

The dramatic tech-sector correction in 2000 showed that bull markets are NOT indefinite and that outrageous PE ratios are not sustainable. In Asia, the recent three years bear market has also caused substantial losses in many portfolios.

However, investment rules have not changed and asset allocation is still the most important decision that investors should make and maintain the discipline to follow.

Asset allocation involves spreading your investments across different asset classes with the intention of maximizing returns, while at the same time, minimizing risks. There are many assets allocation strategies one can choose from, ranging from defensive (cash and government bonds), conservative (cash and bonds), balanced (a mix of equities, property and property securities and fixed interest instruments), growth (a higher weighting of equities and property than balanced) through to the aggressive, (which may include investments in Emerging Markets and could include derivatives and hybrid securities).

Each asset class will deliver a certain mix of risk versus reward. For example, cash offers very little investment risk, but at the same time, little potential investment upside. On the other hand, equity markets have historically delivered much better returns. For example, from 1982 to 1997, US stocks delivered a total return of 12.8% net after inflation. However investing in the stock market carries risk - you only have to look at the 60% correction in the Nasdaq after April 2000 to see that.

Large market corrections, like the one experienced in the Technology Sector, highlight one of the fundamental reasons for investors to pay careful attention to asset allocation, and that is - Diversification.

Diversification can simply be translated into 'Don't put all your eggs in one basket'. By reducing exposure to technology stocks through diversification, a carefully weighted portfolio would have limited the possibility of loss of capital during the tech bubble correction, and may have benefited from exposure to other asset classes.

Studies have shown that up to 94% of a portfolio’s investment return is due to asset allocation, with stock selection and the ability to pick when to enter or exit a market being the lesser factors affecting returns.



Asset allocation should also include a careful analysis of regional, sector and industry variations, to take advantage of contrary performance. For example, while Asian markets were trending down from 2001 to 2003, Australia’s economy was particularly robust, resulting in steady gains for the Australian share market over the same time.

Asset allocation, more than any other factor, will contribute most to the growth of your investment portfolio, but it should not be seen as a set-and-forget strategy. Many factors come into play in determining your asset allocation strategy, and your personal circumstances, goals and needs should be taken into account with every review.

Consult a qualified financial planner to analyse your financial situation, set out your goals and create a portfolio that will achieve them over your time period. Importantly, your financial planner should also be reviewing your portfolio and your personal situation regularly then rebalancing your portfolio if necessary to maintain an efficient asset allocation.

Bernard Maughan is the CEO of Professional Investment Advisory Services Pte Ltd, a licensed Financial Adviser.