Three steps to your own Asset Allocation
A lot of the financial services market is topsy-turvy, turning out to be exactly the opposite of that which you might expect. Bespoke advice is cheaper than buying retail. ´Best advice´ as a regulation does not exist. The more complicated your affairs are, and the more you know, the less you pay, and the better your results. ´Buy and hold´ is no longer working. The armchair investor is pushing up the daisies. And pension fund managers are not trying to make us money. Asset allocation is your most powerful individual tool to make your money grow,and stockbrokers are not taught how to work it out for you. So, if we´re in charge, how do we do it?
Asset allocation is not a science yet, because we cannot yet model the world in sufficient detail to know the effect of one change. But we can get an idea of what will happen if we assume a fair amount of stability in world investment markets for the near future because that´s what we have observed in the past. Then we can measure risk, and return of each of the world markets (we choose 15 to 20 of them), and then we can work out the best return we could have made by combining these for a given risk. That mix is what you need. Think of it like a cherry cake recipe. It will change if your ingredients change taste and nature, but it will be reasonably stable for some time. Your investments had to have that mix to have given you the best growth for a given risk in the past. So here comes the ´art´ part.
And today´ it´s particularly tricky. We have to look ahead and guess what each market will provide for us in risk and return over the next ten years. We don´t mind telling you this takes half our day, and most of it consists of reading IMF, World Bank and UN reports. But you probably know more than you think. Just take the history of what has happened in the last ten years (and we´ll show you where to get those real time numbers) and adjust., From the top, your three steps are:-
A. Decide the least amount of money you will need to spend to have a life worth living, without having to work
B. Convert that into a financial target using the rough formula of 30 times - this is the amount you need to get to before stopping work (if that ever happens). Using one of our educational tools, work out the optimum risk to achieve that financial target.
C. Using the third educational tool, convert that to an asset allocation for today:-
- Plug your ´best risk´ into the model you can download from our client site (or you can use the riskgrades web site)
- Press the ´best´ button to work out your asset alocation
- Believe it, do it, and keep on re-assessing every six months
Every few months we hold a webinar to explain how to do this in little practical steps. The webinar is a good place to compare notes with your peers, and we provide notes which we update after every webinar. To download the notes from the last webinar, click on the link on the side of this article. It takes a bit of time, but assuming you already have £300,000, you´ll make an extra £15,000 p.a. so it´s worth your effort. When you´ve done it once, you´ll know more than your financial adviser.
© copyright 2011-2012 Fee-Only Planning Ltd. Best Money Decisions, all rights reserved. Excerpts may be quoted with full acknowledgement by prior agreement. This Money Tip is not advice you can rely upon alone for making decisions: always seek professional advice. This is not an incentive to buy or sell any security. This type of research information is only available for those who have passed the Competent Investor Quiz at the end of our book.