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Step 3: Agreeing on the Asset Allocation
Determining on the asset allocation is the foundation of my client’s investment plan. The 3 asset classes are Equities, Fixed Income and Money Market.
Equities are more risky but offers potential to get higher returns while Bonds are able to get reasonable returns with lower risk and money market are shorter duration bonds of as short as 1 year which are even more stable than normal bonds.
We’ll agree on the percentage band of equities in the portfolio depending on the client’s risk profile.
For example, Growth Portfolio (60% to 80% equities),
Aggressive (70% to 90% equities), etc.
I adopted some suggestions from Larry Swedroe’s book “What Wall Street Doesn’t Want You to Know” as a guide on the maximum equities allocation to be recommended on top of what my company suggested.
a) Investment Horizon ==> Maximum Equity Position
<3 yrs =”=”"> 0% Equity
4-6 yrs ==> 30% Equity
7-10 yrs ==> 70% Equity
11-20 yrs ==> 90% Equity
>20 yrs ==> 100% Equity
