MONEYSENSE 08.22
Is Your Investment Portfolio Sound?
By Ray DiBartolomeo
In finance, a portfolio is a collection of investments.[1] The term portfolio refers to any combination of financial assets. Portfolios may be held by individual investors or managed by financial professionals, hedge funds, banks, and other financial institutions.[2] The monetary value of each asset may influence the risk/reward ratio of the portfolio.[3]
Asset allocation is the implementation of an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset. It is designed according to the investor’s risk tolerance, time frame and investment objectives.[4] Many financial experts argue that asset allocation is an important factor in determining returns for an investment portfolio.[4]
Asset classes
An asset class is a group of economic resources sharing similar characteristics, such as riskiness and return. There are many types of assets that may or may not be included in an asset allocation strategy.[5] Here are 10 types of assets classes.
Traditional assets
1. Stocks: value, dividend, growth, or sector-specific; large-cap versus mid-cap, small-cap or micro-cap; domestic, foreign, emerging or frontier markets.[6]
2. Bonds/Fixed Income: investment-grade or high-yield bonds; government or corporate bonds; short-term, intermediate, long-term; domestic, foreign.[7]
3. Cash – checking/deposit account, money market fund.[8]
Alternative assets
4. Commodities: precious metals, nonferrous metals, agriculture, energy.[9]
5. Real Estate: commercial or residential, REITs.[10]
6. Collectibles: art, coins, stamps. [11]
7. Insurance products: annuity, life settlements, catastrophe bonds, personal life insurance products.[12]
8. Derivatives: options, collateralized debt, and futures.[13]
9. Currency: dollars ($), euros (€), rupee (₹), yen (¥), pounds sterling (£).[14]
10. Venture capital/Private equity: private funds to startups, early-stage, emerging companies, leveraged buyouts, growth capital, distressed investments.[15] [16]
Allocation strategy
There are several types of asset allocation strategies based on investment goals, risk tolerance, time frames and diversification. The 4 common forms of asset allocation are: strategic, dynamic, tactical, and core-satellite.[17]
Strategic asset allocation
An asset mix that seeks to provide the optimal balance between expected risk and return for a long-term investment horizon.[18]
Dynamic asset allocation
Similar to strategic asset allocation in that portfolios are built by allocating to an asset mix that seeks to provide the optimal balance between expected risk and return for a long-term investment horizon.[19]
Tactical asset allocation
An active approach that tries to position a portfolio into those assets, sectors, or individual stocks that show the most potential for perceived gains.[20]
Core-satellite asset allocation
A hybrid asset allocation that contains a “core” strategic element making up the most significant portion of the portfolio, while applying a dynamic or tactical “satellite” strategy that makes up a smaller part of the portfolio.[21]
At Ironcrest Capital Management, we strive to make sure that everyone we work with has a strong understanding of their investments. Having a good approach and focus on the most important factors before investing is key. Let us help you make the right decisions. If your current investing approach isn’t working, reach out to us so we can help.
