Page 246 - DMGT515_PERSONAL_FINANCIAL_PLANNING

Unit 13: Strategies of putting together a Complete Financial Plan

If software is being used to assist in writing up the plan, be sure that the recommendations made Notes
absolutely support the person’s specific needs, objectives and goals, and that the report as a
whole is customised to the person. This will help avoid a sameness about all the plans you
prepare.

Asset Allocation: The Key to Achieving Higher Returns

Many investors still believe that they can effectively ‘beat the market’ and earn a higher rate of
return on their investments by picking individual assets that will outperform the overall market.
This is not the factual position as the harsh reality of today’s markets is that the rapid dissemination
of investment information has led to a situation that no one investor knows more than the rest
of the market.
The only way to boost return is by achieving better asset allocation.

Asset Allocation Theory Boosts Returns by Spreading Investment Risks

This strategy focuses on an investment portfolio technique that aims to balance risk and create
diversification by dividing assets among major categories such as cash, bonds, stocks, real estate
and derivatives. Each asset class has different levels of return and risk, so each will behave
differently over time. For instance, while one asset category increases in value, another may be
decreasing or not increasing as much. Some critics see this balance as a settlement for mediocrity,
but for most investors it’s the best protection against major loss should things ever go amiss in
one investment class or sub-class.

The consensus among most financial professionals is that asset allocation is one of the most
important decisions that investors make. In other words, your selection of stocks or bonds is
secondary to the way you allocate your assets to high and low-risk stocks, to short and long-
term bonds, and to cash on the sidelines.
However, taking action on asset allocation too frequently, say weekly or even monthly, may
result in sacrificing returns as you move out from the outperforming asset class to the under-
performing asset class. An appropriate balance needs to be achieved here.

We must emphasize that there is no simple formula that can find the right asset allocation for
every individual – if there were, we certainly wouldn’t be able to explain it in one article. We
can, however, outline the below risk return trade off, that we feel is most important when
determining the asset allocation:
The key to this investment strategy is to maximize the level of diversity within the entire
portfolio by spreading the investments across all major asset classes, and then to ensure
diversification in terms of how these securities react in a given set of circumstances.

Task Give an example to explain how the investments strategy and plan will work and
benefit to investor.

Importance of Asset Allocation

Asset Allocation is a personal planning tool that helps assure that an investment portfolio is
tuned into the goals, objectives, and relevant time frames of each individual investor. While this
process can be performed on any portfolio with two or more assets, it is most commonly

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