Asset Allocation

Asset allocation is the key ingredient in our working partnership. In simplest terms, asset allocation is the process of deciding which broad categories of investments to invest in, and then dividing up the money in your portfolio among them. These broad categories are called asset classes (more on these later).

Advantages of Asset Allocation

  • It's investing -- not speculating. The goal is consistent long-term performance rather than spectacular or disastrous short-term results.
  • It's a proven long-term diversification strategy that balances risk and return.
  • It takes the guesswork and emotions out of portfolio management.
  • It focuses on the portfolio as a whole.
  • It's the best way to create a portfolio that will stay in line with your investment objectives.
  • It's easy to implement, monitor, and rebalance.

Determining Your Asset Mix

  • Risk Tolerance -- Our fact finder determines which one of our five investment models you best fit into.
  • Any anticipated lump-sum or ongoing income needs -- for example, college tuition or a second home.
  • Current amount of investable assets.
  • Age and life expectancies of everyone expected to benefit from your portfolio.
  • Income from any other sources.

Asset Classes

In general, I-Pension investment models are based on 13 asset classes:

  • Cash
  • Short-Term Bonds
  • Intermediate-Term Bonds
  • High-Yield Bonds
  • International Bonds
  • U.S. Large-Cap Value Stocks
  • U.S. Large-Cap Growth Stocks
  • U.S. Mid-Cap Stocks
  • U.S. Small-Cap Stocks
  • International Stocks
  • Emerging Market Stocks
  • Real Estate
  • Commodities and Natural Resources

Not all asset classes will be used in all models, and the weighting of each asset class will vary depending on your investment temperament, risk tolerance, and I-Pension economic forecasts.

The Asset Allocation Investment Pie

Think about asset allocation as the process of making an investment pie. When you make a pie, you use different mixes of basic ingredients. Sometimes you use white flour and sometimes wheat. Sometimes you use fruit filling and sometimes custard. It's the same thing when making an investment portfolio -- you build the model based on what you want the end result to look like. Here's an overly simplified example that illustrates the point.

Rules-Based Rebalancing

Rebalancing is a critical element of asset allocation. It helps ensure that your portfolio reflects your needs and goals. It also provides a systematic means to "buy low and sell high."

I-Pension uses a rules-based system, an approach we believe is preferable to the more common calendar-year rebalancing. Here's how the two approaches differ:

  • Calendar-Year Rebalancing: At predetermined times, usually annually but sometimes quarterly, the portfolio is rebalanced back to the original allocation.
  • Rules-Based Rebalancing: When the portfolio allocations are determined, a "rebalancing threshold" is also established and rebalancing occurs whenever that threshold is hit. For example, if a particular asset class comprised 10% of the original portfolio allocation the thresholds might be set at 8% and 12%. When a threshold is hit within a tax-deferred account like a 401(k), the entire portfolio is rebalanced – not just the one asset class in question. In taxable accounts, we consider the tax implications of rebalancing and will usually consult the individual client before trading the account.