Statistics continually show that a portfolio’s asset allocation has the greatest influence on its eventual performance.

Asset Allocation can mean a lot of different things depending on who you talk to.  This being the case, I like to explain a portfolio’s ultimate construction through a simple concentric circles theme.  There are more detailed elements of asset allocation within the circles, but this simple notion helps build a solid framework for portfolio construction.

Core Holdings

The largest individual circle is the center circle.  These holdings are intended to comprise the largest percentage of an overall portfolio’s assets.  This is where you will hold assets you feel are particularly long range oriented.  Of course, we still follow exit strategies and avoid a pure “buy and hope” mindset; but these holdings are the time tested stalwarts you believe should weather the majority of shorter term economic or market storms.  Strategies like our World Class Money Managers program or holdings like category dominating higher dividend paying companies would be examples of these center circle holdings.

Tactical Holdings

From time to time having over-weight exposure to certain geographic spots of the globe or industry sectors within the markets is wise.  We don’t endorse the notion of over-concentration to the point where a portfolio’s outcome is dependent almost entirely on the fate of any one asset or theme.  There are, however, times to focus investment attention in specific rather than just general areas.  For example, perhaps the time is right to have more technology or energy exposure.  Or maybe holding more in the Southeast Asian stock or domestic high yield bond markets makes sense.  This can be done through targeted funds or ETFs.  Individual stocks or bonds, of course, could also be the preferred method depending on each client’s comfort level.

Risk Management Holdings

Investors should always be mindful of the risks they are assuming.  These might be risks to their core capital or perhaps to their retirement income streams.  Successful investing isn’t about avoiding risk; it is about properly managing risk.  Investors should always know the answer to the all-important question:  “what if I’m wrong”.  Within each portfolio there should be strategic elements of risk management.  Just as well defined exit strategies should be in place for the Core and Tactical pieces of a portfolio, other risk management holdings like inverse funds or hedging options should be considered as tools to guard against excessive risk to capital.  Also, to guard against excessive risk to an income stream, annuities or other guaranteed assets should be considered.

How much to allocate to each of these circles will vary based on the unique needs of every client.  Allocation among the chosen holdings within each circle is important as well; but the thought process of constructing a portfolio adhering to this simple concentric circles theme helps assure suitable exposure at each stage of a portfolio’s life.