Asset Allocation		  
 
In understanding asset allocation, one must first be aware of the different components that are involved in asset allocation.
First, what is an asset?
An asset is a resource with economic value that an individual or corporation owns or controls with the expectation that it will provide future benefit.
The primary classifications of assets are: current assets, long-term assets, intangible assets, alternative assets, and contingent assets.
  • Current assets are the assets that are expected to be converted into cash within one year and are used to fund the day-to-day operations and pay ongoing expenses. Current assets include cash, accounts receivable, inventory and other liquid assets that can be readily converted into cash.
  • Long-term assets are plants, equipment, real estate, and other capital assets that are not expected to be liquidated in under one year’s time.
  • Intangible assets are not physical in nature. They are items such as patents, trademarks, and copyrights that are less liquid than traditional investments but are very valuable for a firm and can be critical to its long-term success or failure.
  • Alternative assets are any non-traditional asset with potential economic value that would not be found in a standard investment portfolio. Examples are art, antiques, precious metals etc.
  • Contingent assets are assets in which the possibility of an economic benefit depends solely upon future events that can’t be controlled by the company. They are often simply rights to a future potential claim and are based on past events.
Now that you know what an asset is, what is asset allocation?
Asset allocation is an investment strategy that aims to balance risk and reward by dividing a portfolio’s assets according to the individual’s goals, risk tolerance and investment timeline. Interestingly, the actual stock or bond that you pick is not as important as how your investment portfolio is divided between stocks, bonds, and other asset classes.
One type of asset allocation model is the Treynor-Black model. The Treynor-Black model tries to determine the optimal combination of passively and actively managed assets in an investment portfolio. The model focuses more on securities’ systematic and unsystematic risk. The more unsystematic risk, the less weight a security is given on the Treynor-Black model. The Treynor-Black model is said to favor low-return, low-risk securities over those with higher risk and return.

There are two types of asset allocation: Strategic Asset Allocation-SAA, and Tactical Asset Allocation-TAA.
  • Strategic Asset Allocation is a strategy that involves periodically rebalancing the portfolio in order to maintain a long-term goal for asset allocation. Because the value of assets can change given market conditions, and the portfolio constantly needs to be re-adjusted to meet the policy.
  • Tactical Asset Allocation is an active management portfolio strategy that rebalances the percentage of assets in order to take advantage of market pricing anomalies or strong market sectors. This strategy allows portfolio managers to create extra value by taking advantage of certain situations in the marketplace. Managers generally return to the portfolio’s original strategic asset mix when desired short-term profits are achieved.
Is asset allocation beneficial for my portfolio?
Asset allocation is one of the most important decisions that investors make. It is the ultimate protection should things go wrong in one investment class or sector, as is likely to be the case from time to time. In using asset allocation in your portfolio, you will earn better returns without losing sleep.

For advice on establishing an asset allocation model to meet your needs, contact us at contact@equinoxsecurities.net .

Equinox Securities, Inc….It’s All About Balance.