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Why Everyone Should Have A Lasting Power of Attorney

How to Invest in a Drawdown Pension

Guide – What Should You Do When Asset Values Are Falling?

A Guide to Behavioral Finance

Guide – Legacy Planning, Gifting, and Charitable Giving

The 5 Minute Money Guide: The Pension Prize

Guide – Sustaining Retirement Income: Will I Run Out of Money?

A Guide to Pension Freedom

Guide – Asset Allocation

Blended Retirement Solutions Guide

5 Minute Guide to SIPPs

A Guide to Defined Benefit Schemes

A Guide to Retirement Income

Guide – Tax & Trust Planning

Investment Performance

Ethical Investment

5 Minute Retirement Guide: Planning your Retirement Income

A Guide to Benefits of Using an Independent Financial Adviser

Asset Allocation and Diversification in Everyday Investing

Factors to Pensions and Divorce

Pensions and Divorce

5 Minute Money Guide: Investing for Income

A Guide to Wealth Protection: Trusts

A Guide to Wealth Protection: Care & Care Fees

A Guide to Wealth Protection: Retirement & Pensions

A Guide to Wealth Protection: Investments

Guide to Wealth Protection: Protecting Your Family

Financial Planning and Life Expectancy

Risks of Income Drawdown

Income Drawdown

Guide – Cash Flow Planning

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  • Our Ethos
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  • Our Company
    • Our Company Structure
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    • Professional Certificates
    • Operational Documents
    • Library & Resources
    • In the News and on the Web
    • Financial Advisor Articles
  • Our Process
    • We Start with You
    • What makes us different
    • Our 3 stage Planning process
    • Our Life Planning Process
    • Your Family Tree and Your Estate Planning
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    • Funeral Planning
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    • Wills, Trusts, Lasting Powers of Attorney, & Other Estate Planning
    • General Insurance
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    • **Robo Advice – Automated Advice – An additional service for our clients**
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    • Platform and Provider Links with thanks to Intuitive Financial Adviser Administrative Support
  • Our Educational Resources
    • The Ultimate Guide to Estate Planning, Legacy Planning, and Inheritance Tax – 2024
    • Demonstration of the Value of Advice
    • Guides for Your Information
    • Listen & Learn – Our Podcast
    • Educational Videos
    • A Complete Guide to Your Will
    • Estate Planning Guides
    • Index to Guides & Videos
  • Our Client Stories
    • Hunt Emerson Comic Artist Extraordinaire
    • Paul’s Financial Future
    • Steven’s Pension Plans
    • Sylvia, a Small Investor
    • Claudette & Advisor Trust
  • Our Blog
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  • Our Ethos
    • The Heart of What we are about
    • Who we are
    • Putting relationships at the heart of financial planning
  • Our Company
    • Our Company Structure
    • Qualifications and Memberships
    • Professional Certificates
    • Operational Documents
    • Library & Resources
    • In the News and on the Web
    • Financial Advisor Articles
  • Our Process
    • We Start with You
    • What makes us different
    • Our 3 stage Planning process
    • Our Life Planning Process
    • Your Family Tree and Your Estate Planning
  • Our Specialisms
    • Areas of Specialisation
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    • Guide – Cash Flow Planning
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    • Wealth Preservation Planning
    • Ethical Investments
    • Defined Benefit Pension Transfers
    • Long Term Care, Later Life, and End of Life Planning
    • Funeral Planning
    • Life Planning and Financial Planning in Later Life
    • Wills, Trusts, Lasting Powers of Attorney, & Other Estate Planning
    • General Insurance
    • Tax Return Service
    • Cash Management Solutions
    • National Savings and Investments
    • **Robo Advice – Automated Advice – An additional service for our clients**
  • Our Financial Pages
    • Latest News
    • Bespoke Financial Calculators
    • Financial Calculators
    • Tax Tables and Reference
    • Financial Reference Sites
    • Your State Pension
    • Platform and Provider Links with thanks to Intuitive Financial Adviser Administrative Support
  • Our Educational Resources
    • The Ultimate Guide to Estate Planning, Legacy Planning, and Inheritance Tax – 2024
    • Demonstration of the Value of Advice
    • Guides for Your Information
    • Listen & Learn – Our Podcast
    • Educational Videos
    • A Complete Guide to Your Will
    • Estate Planning Guides
    • Index to Guides & Videos
  • Our Client Stories
    • Hunt Emerson Comic Artist Extraordinaire
    • Paul’s Financial Future
    • Steven’s Pension Plans
    • Sylvia, a Small Investor
    • Claudette & Advisor Trust
  • Our Blog
  • Our Contact Details

Asset Allocation and Diversification in Everyday Investing

Investments will rise and fall in value from time to time.

The goal is to ensure the long-term rise is at the optimum level for our individual risk position. “Slide” Goal = optimise the long-term return. In seeking to optimise long-terms returns we have to be very wary of losses and particularly the three “S’s”.

  • Losses
  • Steep
  • Sudden
  • Sequential

Investors need to avoid these type of situations. Series of quick flash graphs appearing showing different loss scenarios over time due to steep loss, sudden loss, and sequential loss – typically where the line is now a descending one. The reason why investors should manage their positions aiming to avoid steep or sudden or sequential losses is because they devastate long-term returns.

Think of cycling.
It takes a lot more effort to cycle up a hill than down a hill. Cyclist free-wheeling down the side of the hill – followed by another image of one going 1 mile per hour up the other side of the hill. If you invest and lose money, the steeper the loss, the greater the recovery required. It is harder to get back to the starting point. So if you lose 10% of your investment value, you need 11% return to get back to the starting point. If you lose 25% of your investment value, you need 33% to get back to the start and 50% requires a 100% future return. The steeper the loss, the higher the recovery required. Losses that are sudden, leave no time for investors to react or come at a bad time when investors do not have recovery options. Sequential losses are maybe smaller but they happen for a few years at a time, this is not great for any investor situation, but especially bad for investors who require income from their investments.

Rule Number One of Investing is therefore all about managing the downside risk. Rule #2 of Investing: See rule #1

All investors should therefore arm themselves with the best risk management tools available. However, unfortunately, there is no magic wand. A person with a magic wand that disappears or falls to the ground. The best risk management tool available to most investors is to diversify and to do so skilfully.

Diversification = the best way to risk manage investments.

Diversification is the application of spreading your investments across different assets, with different risk levels and finding the right percentage amounts for each part. And then managing this on an ongoing basis. It’s the eggs in baskets analogy. Investor images with eggs and baskets in front of them. High Risk investor with eggs all going into one basket. Managed Risk Investor with lots of eggs and lots of baskets. The eggs and baskets have to represent the different asset types and different risk levels. Plus the percentage in each.

What is an “asset type or asset class?”

There are lots of different asset types and they have different levels of risk. How you split your amounts into each basket will determine your overall risk position. It is this management of the eggs into the basket that represents the asset allocation approach and the principles of diversification. It is how skilfully this is done that will determine the long-term outcome. Skilled diversification is the best way to risk manage your investments position.

How do you know what amounts to allocate?

Work with a skilled asset allocation manager who can help you determine this for your risk position. Show a professional person working with the investor helping to work out the percentages in each basket. Very importantly, this should be reviewed, renewed and rebalanced over time as circumstances change and results appear, because this will impact the percentages that are best at those different points in time. This is what we do and this is how we work with our clients to strive for the optimum position and to help them with exceptional investment experiences.

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