Investment Strategy with Greatest Likelihood to Reach Goals and Objectives
Financial industry practice supported by academic studies have led financial advisors to conclude that the selection of asset classes and the subsequent reallocation of portfolio assets have more impact on the long-term performance than any other factor. For this reason, investors must understand the differences between asset classes and why they are selected for their personal investment portfolio. The recommended investment strategy is based on a client’s:
- Risk Tolerances;
- Current Asset Allocations;
- Time Horizon; and
- Performance Measurements.
The recommended asset allocation for an investment portfolio is designed to provide the greatest likelihood (probability) of meeting the stated investment objectives. The asset allocation model is derived from various statistical models based on historical information. The historical analysis creates a risk profile for each asset class and is used to formulate the composition of the investments made based on the following factors:
- Risk of each asset class;
- Expected return of each asset class; and
- Correlation of asset class with other asset classes.
The process described will provide a good indication of the expected performance of the investment portfolio over the time horizon based on historical information. This can best be described as a static, “history repeats itself”, scenario which is used by many financial advisors. This type of forecasted outcome is couched in terms of the “long run” which will fail to placate an investor when they come to the conclusion that their True North is nowhere in sight.
To keep your destination in sight, a rigorous financial planning process must be followed on a continuous ongoing basis to adjust financial plan objectives or reallocate your asset allocations to reflect current market conditions.
