Asset Allocation: The Mortar of Portfolios

Asset allocation is a subject frequently mentioned here at ITA Wealth Management.  For many beginning investors, it is a new topic, yet so familiar to the investing world it is assumed everyone knows what it means.  This blog post is to show a sample asset allocation plan and explain some of the reasons why it is set up as it is.  Here we have a Dashboard worksheet extracted from the TLH Spreadsheet.  It is familiar to ITA readers.

This asset allocation plan is made up of seventeen different asset classes.  The United States stock market is broken into nine different classes as shown in the upper left of the screen shot.  On the left-hand column we have value oriented equities and on the right are growth asset classes.  In the center column are blend or core asset classes that range from large down to small-cap asset classes.  All our portfolios are skewed toward value for reasons articulated throughout this blog.

Across the bottom rows we have Cash, Bond-Income, Developed International, U.S. REITs, Emerging Markets, Commodities, International REITs, and just above, International Bonds.

The target percentages have a white background.  For example the target for Large-Cap Value is 7.0%.  Currently, 7.6% of the portfolio is invested in this asset class and it is within the 25% Threshold limits.  That is why one sees the blue-green background.  Large-Cap Blend at 5.3% is over the target of 4.0% so it is coded red.  Asset classes showing up with purple background are under target.  With a number of asset classes out of balance, this portfolio needs attention in order to bring the asset classes back into balance.

Asset allocation plans are quite personal and no one plan fits all investors.  For example, many older investors will hold a higher percentage in bonds.  If not bonds, then perhaps CDs or high-yield stocks.  Other investors will not consider commodities.  In this particular asset allocation plan, 38% is allocated to international markets.  While that may seem high, it reflects the current state of the global markets.

Regardless where you are in your investing career, consider laying out an asset allocation plan along the lines shown in the above Dashboard.  While your target percentages will vary from this plan, it is essential to have a plan.  Asset allocation plays a non-trivial role in portfolio performance.