Asset Management is the stage where you decide on your strategic asset allocation, essentially how your funds are to be split between equities and fixed income. The higher the equity component, the higher the risk but the greater the potential return and vice versa.
It’s important to determine an asset allocation that is in line with your risk tolerance and investment objectives but most importantly, one that is in line with your time horizon.
If you have a goal that has a long time horizon, then you may choose to invest in a more aggressive high risk investments. If your goals are more short term in nature, then you may embrace a conservative or defensive portfolio.
Asset Management Example: Model Asset Allocation
Risk Tolerance Questionnaire
When putting together your asset allocation, you’d have to decide how you want to split your portfolio between the two asset classes and the amount of risk you’re willing to embrace. The easiest way to do this is using a risk tolerance questionnaire where you would answer a number of questions about your risk appetite and investment objectives. The results would indicate how your funds should be allocated.
Age Approach
You can also determine your asset allocation by using the age approach where your age is the equivalent percentage you should have in fixed income/bonds. For example, if you’re 30 years old, your asset allocation would be 30% bonds and 70% fixed income. As you get closer to retirement, the bonds component would go up to preserve your capital while the equity component would go down, to lower your volatility.
