Asset Allocation Principles

Five Asset Allocation Principles for Use in Improving Financial Market Conditions

Here are five asset allocation and investment principles to keep in mind:

Asset Allocation Principles 1

Know who you are as an investor. Understand your psychology and emotions, as well as your tendency to buy-to-hold investments versus buy-to-sell investments. Also consider the degree of opportunism in your investment approach, your current and future financial and tax status, risk and liquidity preferences, and annual capital inflows and outflows.

Asset Allocation Principles 2

Make sure to consider all of your financial assets (and any liabilities) holistically. Recognize the strengths and weaknesses of each asset class and specific asset, what each asset can and cannot do, and in which structural form it is best to hold each type of asset. In addition, seek to gain an understanding of the longterm forces which determine an asset's returns, risk, and correlations.

Asset Allocation Principles 3

Be mindful of short-term and long-term market cycles. Many asset classes have the tendency to reach extreme levels of overvaluation or undervaluation.

Asset Allocation Principles 4

Recognize when certain types of assets may exhibit a period of multiyear returns substantially below long-term averages.

Asset Allocation Principles 5

Be mindful of the fundamental diversification choices in asset allocation. These choices include the degree of exposure to stocks vs. bonds, to U.S. vs. non-U.S. securities, and to alternative vs. conventional assets; how frequently to rebalance the portfolio; and what guidelines to follow in readjusting the portfolio in response to price-driven changes in asset weightings.