Building Life Plans, One Client at a Time

Asset Allocation 101

This week we look at one of the key steps in building an effective portfolio strategy: asset allocation.

Allocating your assets effectively simply means building a portfolio across different types of securities in alignment with your situation, goals, and objectives. Investments are typically broken down into these asset classes:

  • Cash (including money market funds)
  • Equities (stocks)
  • Fixed income (bonds and notes)
  • Real assets (metals, commodities, real estate, collectibles, agricultural land, and oil)
  • Alternatives (such as private equity, hedge funds, and master limited partnerships)

To understand your whole financial picture, we typically start by looking at all of your holdings—everything you own—not just your investment portfolio.

Next, we view your investment portfolio in the context of your total assets. For instance, if you work for a tech company and have a lot of stock or options in the company, we would consider that in determining how much to allocate to equities, and within equities, how much additional tech exposure you should have. Similarly, if you own a lot of real estate, we wouldn’t include that type of investment in your real assets allocation.

How your investable assets are distributed among asset classes depends on your tolerance for risk, designated time horizon and, of course, your specific goals. Effective asset allocation enables you to build a portfolio that balances risk and reward based on specific requirements. However, to be effective, it must also be dynamic, responding to evolving goals and changes in your economic situation, as well as to fundamental economic trends.

For example, the younger the investor, the more likely the client would be to concentrate heavily in stocks and other growth-oriented investments. However, as investors age, they have less time to ride out market declines, which generally means the allocation to fixed income and other relatively stable investments increases.

Numerous studies indicate that asset-allocation decisions have a far greater impact on a portfolio’s performance than do the specific securities within each asset class. However, that does not diminish the importance of appropriate diversification.

Therefore, we also diversify within each asset class. In the case of stocks, we would diversify by market capitalization (large-cap, mid-cap, and small-cap companies); industry; geography (domestic and foreign); and market development (established or emerging markets). Similarly, an allocation to fixed income may include bonds of varying duration, from a variety of issuers, and from both domestic and foreign markets.

The chart shows how a portfolio diversified across classes is likely to have more even performance results over time than a concentrated portfolio. A diversified portfolio is expected to have less severe swings in value.

The Goal of Diversification:

To Limit Volatility Without Compromising Returns



We also invest tactically. That is, we may rebalance the percentage of assets held in various categories in order to take advantage of market pricing anomalies, strong or undervalued market sectors, and/or fundamental economic trends.

In short, each portfolio we build is customized for each client, employing appropriately weighted allocations and thoughtful diversification.

If you have any questions, please feel to call Faraz at (925) 365-1533 or send an e-mail to

*Returns are shown for periods of 1, 3, 5 and 10 years ending on 5/31/13. Because advisory fees, sales charges, and transaction fees will vary depending on individual holdings, figures are illustrated on a total return basis, gross of all fees, and assume reinvestment of dividends, interest, other income and accrued income. Fees however may materially change the overall performance of any investment portfolio or strategy and should be reviewed carefully before making any investment decisions. Composite is for illustrative purposes only, a hypothetical mixture of 40% S&P 500 Index, 30% US Aggregate Bond Index, 20% MSCI EAFE Index, and 10% MSCI Emerging Markets Index. You cannot invest directly in an index or in the hypothetical index composite. Figures are provided by Morningstar, Inc. and are believed to be reliable but are not guaranteed. Past performance is no guarantee of future results.

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Accretive Wealth