02 4 steps to plan the asset allocation that suits you

The so-called four-step approach to asset allocation is derived from the idea of David Swenson, a former investment officer of the Yale Endowment Fund, which is divided into:

Determine investment objectives and risk preferences; determine the scope of investment; determine the proportion of asset allocation; review and rebalance regularly.

1. Determine investment objectives and risk preferences

If you are a radical investor, you may not be inclined to invest most of your money in low-yielding assets, while if you are a defensive investor, you may not feel at ease after investing in highly volatile, risky assets.

Therefore, you need to confirm your investment objectives and risk preferences before investing. Usually before you open an account to trade, you should fill out a questionnaire or test questions, and then confirm your risk level. However, people with the same risk level may not necessarily choose exactly the same asset allocation, but also need to consider investment objectives.

• If the main purpose of an investment is to lay out the industry you like, and you think the industry has a good momentum of development, you may prefer industry-themed funds.

• If you are saving for parenting and diversifying investment to reduce risk, you may prefer stable and balanced assets.

• If it is for old-age savings, spare money management, do not want to take big risks, may prefer goods base and debt base and other low-risk assets …...

2. Determine the scope of investment

If the funds are only allocated to the two "baskets" of Apple Inc and Microsoft Corp, can they be counted as asset allocation? Both of them are large technology stocks with high correlation, so the investment risk is not significantly dispersed.

Asset allocation is often considered not in the two stocks of the same type with strong correlation, but more refers to scattered into different types of assets with weak correlation.

Asset allocation usually includes the following four categories. To put it simply, the higher the return potential of an asset, the greater its risk and volatility.

• Equity assets:Stocks and derivatives such as stock options and futures tend to have high yield potential and high volatility.

• Fixed income:Mainly refers to bonds, and can be divided into treasury bonds, investment grade bonds, high-yield bonds, etc., often yield potential and volatility are lower than stocks, higher than cash

• Cash:Bank deposits, money funds and other cash equivalents are often safe but difficult to beat inflation

• Alternative assets:Different from the first three traditional investment categories, it can be divided into commodities, real estate, hedge funds and works of art, which is suitable for playing an aggressive role in the portfolio, but it also requires investors to have relevant expertise, which is often more demanding.

For some ordinary individual investors, the investment of stocks and cash savings has been very convenient, but the investment threshold of some bonds and alternative assets is high, and it is not convenient to invest, so it is easier to use bond funds, REITs, and commodity-themed funds. After all, there are many types of funds, wide coverage and low threshold for starting investment.

3. Determine the proportion of asset allocation

If you have decided to allocate some stocks, currencies and commodities, or industry-themed funds, bond funds and monetary funds, which assets will dominate?

In addition to considering your own risk preference, you can also refer to strategies such as stock-debt balance, life cycle investment, Merrill Lynch clock and strategic and tactical allocation. In the next lesson, we will introduce these strategies in more detail.

4. Regular inspection and rebalancing

After the asset allocation is completed, it needs to be reviewed regularly. Due to market fluctuations, the allocation ratio of major assets tends to deviate more and more from the original ratio over time, and then the income and risk of the whole portfolio will change.

Rebalancing is to restore the set ratio so that the entire portfolio is in line with your investment goals and risk preferences.

For example, if a growth fund has risen a lot this year, far more than you expected, consider rebalancing your portfolio by shifting some of your money to another value fund. By rebalancing, it is more likely to sell at high points and buy at low points.

In addition, changes in investment experience and living conditions will also lead to changes in investment preferences, and redistribution of assets can be considered after regular review.

The next lesson, "ready-to-use Asset allocation Strategies", also deals with how to adjust assets according to changes in investment preferences.