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Intro to stocks

Determining Your Asset Mix

As the markets continue to follow a volatile course, there is considerable uncertainty as to whether or not the current upward trend is for real. With opinions ranging widely as to the direction of the next big move, now, more so than ever, is the time for you to ensure that you own a balanced portfolio tailored to your needs. The appropriate "asset mix" or percentage of your total portfolio allocated into each asset class is a critical issue investors must address. By diversifying your assets into different categories, temporary downturns in one class can be partially offset by gains in another. As a result, total portfolio returns should tend to be more consistent over time.

For the purpose of simplicity, our study will outline a mix of cash, fixed income (i.e. bonds and term deposits), and equities (common stock). However, these are by no means an exhaustive list of the possible investment vehicles available to you within your portfolio. The standard or rule-of-thumb asset mix generally used within the investment industry is the 60-30-10 rule. It suggests we place 60% of our portfolio funds in equities, 30% in fixed income securities, and 10% in cash.

Although this is a solid framework with which to begin from, we feel it is important to tailor your asset mix further to suit your individual investment situation and needs. As a starting point, we suggest you consider your time horizon and personal level of risk tolerance.

Time Horizon

For a relatively young, healthy, newly married or single person, with a long term investment horizon, a 70-25-5 asset mix may be appropriate. Typically, this individual has a moderate tax rate and a higher risk tolerance, yet the later is often unique to the person. As we have emphasized in the past, historically, over the long run, equities have vastly outperformed all other asset classes. Consequently, for those blessed with a considerable holding period, an over-weighted exposure to common stocks is often a prudent choice.

For a middle aged individual, possibly with a family and likely in his/her peak earning years, the standard asset mix of 60-30-10 should do the trick. If the subject is concerned with such uncertainties as the availability of college tuition or is on the verge of entering his/her golden years, a five or ten per cent increase in fixed income securities at the expense of equities is an option. Indeed, the same strategy could also be used if the individual is looking to increase his/her overall income level. It is still a good idea to be relatively over-weighted in equities at this point. Often, middle-aged investors (beginning between 40-45) continue to have an investment horizon of over 20 years.

Older investors, likely seeking income and a higher degree of safety may begin with a more conservative 45-50-5 asset mix. Often these individuals are in a lower tax bracket and can take advantage of the steady income provided by fixed income securities. As income is required, the percentage of fixed income securities can be increased. Having said this, it is often the case that many older investors find themselves with more time on their hands. As a result, and if they are inclined, they are in a position to educate themselves further on individual companies and make effective investments. If they are receiving a reasonable pension and have a relatively substantial portfolio, these investors can often combine their research with other sources and be quite successful.

Risk Tolerance Level

While a longer time horizon inherently biases the above weightings toward equities, an investor must also take into account his/her personal level of risk aversion. For an individual who can stomach the often volatile yearly returns associated with common stocks, then the relatively aggressive long term stance of 70-25-5 could prove to be ideal. However, for those who find themselves getting a little "queasy" over the market's constant gyrations, a more conservative mix is definitely appropriate. If your equity investment is leaving you with too many sleepless nights, then an aggressive equity stance is not right for you.

In Conclusion

We stress that you remember the above recommendations are only guidelines. When approaching the question of your own asset mix, a multitude of other factors including your disposable income, personal taxation level, and overall level of financial resources must be considered. If you are just beginning to build your portfolio (with a modest amount of capital), your initial purchases will inevitably leave you over-weighted in one or two classes. Again, we advise you purchase gradually and diversify over time.

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