Strategic Asset Allocation & Financial Planning

A customized approach to the long term, strategic allocation of your assets

Investments need a strategic foundation: “Getting your strategy right” is the single most important determinant of long term success. We help our clients decide on their strategy through a process called Strategic Benchmarking. Using scenario modeling, we illustrate how changing the allocations to asset classes such as bonds, equities, real estate and commodities change:

• the chances of the portfolio meeting particular long term returns;
• the “Value at Risk” — the worst case annual losses in the portfolio.

To formulate the right strategy, the logical approach is to establish a certain level of performance potential, and then optimise the allocations to the various asset classes so that the “Value at Risk” is minimised. Obviously, the core problem is that long term returns are impossible to predict. Therefore, rather than focusing blindly on expected returns, it is more sensible to compare the “upside potential probabilities” of various portfolio allocations.

The end result of this process is a very clear indication of:

• how much risk can be taken out of the current portfolio without hurting “upside potential”;
• what percentage allocations to each asset class are required to achieve that risk reduction.

This outcome becomes the “strategic benchmark”: the optimal percentage allocation to each asset class, established to meet the goals of the investor. It serves a dual role:

• as a long-term instruction of how the actual portfolio should be invested;
• and as an objective annual yardstick to judge the results of the real portfolio.