Simple Asset Allocation Model
Originally published: 13/07/2021 12:10
Publication number: ELQ-77291-1
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Simple Asset Allocation Model

Basic guidance on how to structure your asset portfolio, for safe and effective investment strategy

Description
This simple model makes it easy to determine how to best structure your asset portfolio, allowing effective risk and volatility management through a balanced and diversified approach, by providing basic guidance for a safe and effective investment strategy.

Asset allocation is an investment portfolio technique that aims to balance risk by dividing assets among major categories such as cash, stocks, bonds, real estate.

Each asset class has different levels of return and risk, each behaving differently over time. The idea behind diversification is that a variety of investments will yield a higher return. It also suggests that investors will face lower risk by investing in different vehicles, rather than "putting all the eggs in one basket".

The process of determining which mix of assets to hold in your portfolio is the results of many different variables, including age, savings capability, time horizon and risk tolerance.

The sequence of the allocation process included in the model:
1. determining the amount of investable assets;
2. creating an emergency fund (kept in bank accounts and highly liquid instruments) equal to your annual expenses plus an extra margin, to cover excess volatility in equity investments, in proportion to the amount invested;
3. determining expected cash requirements for the next 5 years, to be kept in term deposits (or Government Bonds) with maturities matching your future disbursements;
4. allocating remaining funds to higher-risk instruments (Equities, Bonds, Real Estate, Commodities, Private Equity, Hedge Funds), based on the methodology table included in the worksheet.

This Best Practice includes
1 Excel workbook

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  • Ariel Rosas(last updated: 21/07/2021 11:53)

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