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Dec.29, 2003
A time proven axiom — and reality — of the investment management business is that proper asset allocation is the single, most important determinant of long-term success. That is accurate — as long as comprehensive financial planning forms the foundation for how assets are invested. Asset allocation designed to accomplish a generic objective such as "growth," "income" or 'balance" ignores the fact that each investor is unique as are their goals. Allocations and portfolio holdings must be personalized to each investor.
Everyone’s financial lifecycle involves three distinct, yet entwined, stages: accumulation, preservation and distribution. Variables such as assets and liabilities, economic and market conditions, personal, family and business circumstances, income and estate tax ramifications and risk tolerance must be carefully analyzed and integrated before an investment strategy and asset allocation can he determined.
There is a direct analogy between Financial Planning (which encompasses both lifetime and estate planning) and building a home. You would never build a home without detailed architectural blueprints that probably went through numerous iterations. Only after the design is complete do you make final decisions as to exactly where the walls go etc. Only after the house is constructed do you turn your attention to the precise finish details.
Similarly, Financial Planning is an interactive process beginning with the collection of objective and subjective client data. Professional analysis of that data produces a series of personalized, coordinated observations and recommendations. Asset allocation guidelines are a part of that analysis. Not all assets have the same"job" to do.
Accordingly, portions of a portfolio may have different asset allocations. The important thing is that the final architecture reflects client assets, client goals and client risk tolerance.
Implemented strategic and tactical plans must be reviewed regularly as little in anyone’s life is static. Think of it as redecorating a room after a period of time because the carpet became worn or the room's purpose changed. Altering asset allocation may or may not be appropriate at given points in time. However, if it is not viewed within the context of a client’s total current circumstances, the foundation for the upper floors will not be as solid as it needs to be. In short, one must plan before they invest.
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