Asset Allocation Explained

Asset Allocation is a financial term that means the amount of money you have invested in each asset class such as stocks, bonds, real estate, commodities, cash, etc. Your asset classes could be shown using a simple pie chart where each slice represents a different asset class. The size of each slice is in direct proportion to the amount of money invested in each asset class. Suppose you have a $100,000 portfolio that consists of $50,000 in stocks, $40,000 in bonds and $10,000 in money market funds. Your asset allocation would be 50% stocks, 40% bonds and 10% cash. A pie chart of the portfolio would show three slices, with each slice sized according to the percent of the portfolio each asset class represents.

Studies have shown that asset allocation is the single most important factor related to a portfolio's rate of return and investment risk. Each asset class has a different historic risk and return associated with it. Asset classes with higher returns generally have a higher associated risk. The primary key to investment success is having a asset allocation with the right mix of asset classes that provides the desired return at an acceptable level of risk. One of the most common mistakes some older investors make is they assume too much risk when the stock market is rising and structure their portfolios with a high percentage of stocks and/or other volatile asset classes. When the stock market falls unexpectedly, their portfolios decline in value far beyond their risk tolerance. Conversely, one of the most common mistakes some younger investors make is they assume too little risk and structure their portfolios with too small a percentage of stocks and/or other volatile asset classes for fear of loss.

The conventional approach to asset allocation is generally based on the investor's stage-of-life. Younger investors have more years until retirement; therefore, they can afford to take more investment risk. Older investors who are close to or in retirement need income and cannot afford to take as much investment risk as younger investors. Using this approach, the conventional investor must gradually adjust their asset allocations over time to take less investment risk and expect lower returns. Sage investment Strategies developed a different approach to asset allocation that enables investors to select an investment strategy they can stay with for life if they so desire. This is possible because the amount of risk associated with most of our strategies is low enough that retired investors seeking income, growth and capital preservation find them attractive, while younger investors who are primarily interested in growth find the more consistent average returns attractive compared with those obtained from a conventional asset allocation strategy.

Our investment approach includes determining the right strategic asset allocations for each of our portfolios. Our mathematical SISTM (the Sage Investment Strategies Timing Model) evaluates the strategic asset allocations and determines which asset classes to invest in and when. Our SISTM generates computerized "buy" and "sell" signals that tactically shift the asset allocations over time based on market trends for the securities representing the various asset classes in each portfolio. By incorporating a constant strategic asset allocation but periodically adjusting the tactical asset allocation for each portfolio, our SISTM has been shown to obtain better risk-adjusted returns than a conventional asset allocation strategy.