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What is Asset Allocation?
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Asset allocation is the process of allocating a portfolio among various asset classes, such as stocks, bonds, international securities, alternative investments and cash. This process seeks to maximize return for a given level of risk. |
The Importance of Asset Allocation
¨ Asset allocation - how a portfolio is divided among various asset classes - is the key factor in investment performance.
¨ Disciplined, methodical asset allocation has proven effective through all market environments.
¨ Superior risk-adjusted returns are achieved by combining uncorrelated asset classes in a balanced portfolio.
¨ Broad diversification is essential: even in the worst market conditions, there are asset classes that perform well.
Asset Classes Used by AgileInvesting
Individual investors typically do not think in terms of asset allocation. As a result, they generally are not exposed to enough asset classes and are not sufficiently diversified. In constructing diversified portfolios, AgileInvesting considers a wide range of asset classes, each of which has its own risk and return characteristics, which are shown in the following table for the time period specified. This chart also shows how highly correlated each asset class is to the two primary components of most investors portfolios: large-cap U.S. stocks (represented by the S&P 500) and bonds (represented by the Lehman Aggregate). Correlation data indicates the diversification benefit to be gained from including an asset class in a portfolio.
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Tactical Asset Allocation
AgileInvesting takes a dynamic, active approach rather than a static, passive approach to asset allocation. A strictly passive approach to asset allocation fails to account for the fact that asset classes periodically reach extreme levels of overvaluation and undervaluation. Such extremes are recognizable using fundamental valuation analysis at the asset class level.
AgileInvesting typically makes tactical asset allocation changes when valuation levels for a particular asset class reach extreme levels, either on an absolute basis, or relative to other asset classes, which represent alternative investment options. This approach is based on the principle of "reversion to the mean" - the tendency of financial markets to return to historical norms or averages following periods of extreme divergence.
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AgileInvesting does not guarantee the accuracy or completeness of this report, nor does AgileInvesting assume any liability for any loss that may result from reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice and are for general information only.
The information contained in this report may not be published, broadcast, rewritten or otherwise distributed without prior written consent from AgileInvesting. | | | © 2009, AgileInvesting. All rights reserved. |
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