Thursday, 21 June 2012

Asset Allocation – Diversify For Financial Success

Smart and intelligent asset allocation decisions can help you gain financial success in the long run. That is why one should be quite mindful, alert and careful while making any such decision, says Richard Cayne Meyer International in Bangkok Thailand. The power of asset allocation comes from reducing risk while increasing returns. Reducing risk by combining multiple asset classes, however, is not a simple process. While each asset has its own unique measure of risk, many assets share similar price behavior (their prices go up and down together in any market). Combining such complimentary investments increase the risk of wild changes in price. Trade-offs between asset risk and expected return must also be considered. High yield assets typically experience high volatility, or large changes in price. These assets must be balanced by investments with lower rates of return to protect against large declines in value.

In the opinion of Meyer Asset Management Ltd’s Asian based servicing arm Meyer International Ltd in Bangkok Thailand, successful asset allocation requires finding the proper mix of assets to balance reward with an acceptable level of risk. Proper allocation planning requires asset research and investment analysis. Fortunately, tools are available to assist the independent investor. Popular financial websites offers independent investors help with educational links and software to build portfolio allocations based on a survey of financial questions. For advanced investors, many books have been written to painstakingly explain the theory and practice of asset allocation - also called MPT (Modern Portfolio Theory). Casual investors can purchase mutual funds specifically designed to automate asset allocation based on an expected retirement date. Careful and practical investors can explore the many financial planners and advisory services that offer asset allocation portfolios specific to their needs.

Getting exposure to asset classes like real estate, bonds, stocks, commodities, currencies, as well as geographic diversification all make sense as part of a well balanced portfolio but how are these asset classes correlated?  That is how do stocks in Japan move when stocks in America move down and what happens to the price of gold or oil as all this happens, how stable is real estate when real estate bubble bursts and stocks are going down at the same time?

Look to investments that consider such questions in their investment philosophy and are taking advantage of such opportunities.  It takes development of ones knowledge base into different asset classes that will help grow and protect your assets into the future and increasingly so going forward, says Richard Cayne. In America and Europe only wealthy investors (or high net worth clients with over $1M in invest able funds) can access certain investments like hedge funds or private equity investments and this is consistently a growth area for the rich so if you want to grow your portfolio or maintain it you must start thinking and learning like high net worth individuals overseas who are not afraid to take calculated risks that make sense.  After all there is no point in being ultra conservative and keeping money in the bank earning near zero rates when inflation is running at 3-4% per year as that means your portfolio is running at an inflation adjusted loss and your wealth is disappearing year after year.  Also, it is unwise to expose your portfolio only to Japanese equities (which haven’t really made any gains over the past 10 years unless you have been an exceptional stock picker) when you can diversify it into varying asset classes spread into different geographical areas. Such diversification will give you a truly balanced and hedged portfolio.

As important as asset allocation is for most people, there is a direct correlation between how worried they are about retirement income, and how much they can actually do about it. This is because the more worried you are, the closer you probably are to retirement, and the less time you have to do anything - like save up. Effective 'saving up' requires time. Time so your money can grow. Save an extra $2000 a month, three years before retirement (at age 62), and you'll amass a grand total of $78,870 (averaging 6% growth). Not likely to have a big impact on your retirement lifestyle.

But what if you invested for retirement when you were NOT worried about it? What if you, say for easy figure's sake, $2000 per month. Assuming, average compound rate of return is 6%.)
According to Meyer International in Thailand, instead of starting to save when you start worrying about retirement (at age 62), and amassing that grand total of $78,870 by age 65, you start saving when you're NOT worried about retirement (at age 45) so you end up with, wait for it, --- $911,290 !
What will $911,290 do for you at age 65? It would provide you with $4560 in additional monthly income for the rest of your life (continuing to average 6% growth), and you won't have to touch your capital. Or, perhaps, you could choose to retire earlier!

Consider your options carefully. Each solution offers its own set of advantages and disadvantages. Pick a style that closely reflects your own. Just how important is asset allocation? It's the single largest determinant of your long-term financial success says Richard Cayne at Meyer International in Bangkok, Thailand.

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