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Asset Allocation

Asset Allocation

Asset allocation is the architectural blueprint for your investment portfolio. Rather than a chaotic collection of securities acquired over time, it is the result of a holistic, systematic process built around your preferences and needs.

Dec 11, 2022Education- 5 min
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Unlike ”stock picking,” which is about selecting individual securities, asset allocation examines how the various categories of securities—stocks, bonds, alternative investments, etc.—perform as a group.

The result of a well-conceived asset allocation is a portfolio that achieves the required return at the lowest risk.

Why consider asset allocation?

A common approach amongst investors is to build a portfolio of ”winners.” The most important question is ”What stocks will generate the highest returns?” Following this strategy, an investor attempts to pick the next Apple or Tesla.

Besides being very difficult (even for experts), attempting to pick winners is not a prudent approach to investment. Asset allocation attempts to answer the question, “What combination of assets will help me achieve my objectives?” It requires consideration of three factors, specific to the investor:

  1. Goals: These are a combination of short-term and long-term goals. These may include the provision of ongoing income after retirement, support for family members, and charitable causes. These goals translate into a required rate of return that the portfolio must deliver.

  2. Risk tolerance: Investments carry different levels of risk. Investors also differ in their ability to endure declines in the value of their investment portfolio. An investor with a low tolerance for risk may be prone to make unwise decisions (such as selling at the bottom of a crash). Investors should remain with their risk tolerance.

  3. Investment horizon: Investors may be well advised to accept greater risk when there is time for a portfolio to recover and there is no pressing need to make withdrawals. The investment horizon is often reflected in asset allocation. The shorter the horizon, in general, the less risky the portfolio.

Based on the above factors, we can proceed to develop a portfolio that meets the risk-and-return profile of the investors. Below are the principle tools of asset allocation.

Fundamental elements of asset allocation

Diversification

By building a portfolio of uncorrelated investments (i.e. investments that do not behave similarly), the gains in some investments in the portfolio tend to offset losses in others. This reduces the risk of the portfolio while preserving the return.

Risk management

Managing the risk of a portfolio is key to ensuring the sustainability of returns. We do this by identifying, measuring, monitoring, and hedging against the various forms of risk to which investments are exposed.

Rebalancing

Not all parts of a portfolio achieve their expected growth. Hence, an asset allocation may deviate from the original blueprint over time. Rebalancing corrects this natural drift and uses gains in well-performing assets to invest in attractively-priced opportunities.

Reinvestment

The power of compounding depends on the growth of the portfolio and the passage of time. Reinvesting income, such as dividends, is a straightforward, powerful way to increase growth and enhance the final value of a portfolio.

Asset protection

It is not possible to eradicate fraud or incompetence, but vigilance goes a long way to ensuring that your assets remain secure and available when you need them. Understanding issues such as custody, identity security, and who is charging you for what can prevent you beyond from many kinds of harm.

We’ll explore all of these five areas in more detail in separate articles in this section. Meanwhile, please consult your advisor or contact The Family Office for any questions or assistance.


David M. Darst, CFA

About David M. Darst, CFA

Since January 2017, David M. Darst, CFA has served as Senior Advisor and Investment Strategist of The Family Office in New York and Bahrain. In this role, he has significantly contributed to the formulation, communication, execution, and monitoring of the company’s asset allocation, investment strategy, and wealth management activities in the Gulf region, North America, Europe, and Asia.

Following a 25-year career with Goldman Sachs in Zurich and New York, David served for 17 years as a Managing Director and Chief Investment Strategist of Morgan Stanley Wealth Management. David was the founding President of the Morgan Stanley Investment Group, and has served for three years as CEO of Petiole Asset Management AG, the Zurich-based asset management arm of The Family Office.

David is the author of sixteen books, including The Complete Bond Book (McGraw-Hill), The Handbook of the Bond and Money Markets (McGraw-Hill), The Art of Asset Allocation, Second Edition (McGraw-Hill) and The Little Book that Saves Your Assets (John Wiley & Sons), which has been ranked on the bestseller lists of The New York Times and Bloomberg Business Week.

Disclaimer

This presentation is provided to you by The Family Office Co. BSC(c) (“The Family Office”) for informational purposes only, and contains proprietary information that may not be reproduced, distributed to, or used by, any third parties without The Family Office’s prior written consent.

All information, figures, calculations, graphs and other numerical representations appearing in this presentation have not been audited and may be subject to change over time. Furthermore, certain valuations (including valuations of investments) appearing in this presentation are subject to change as they may be based on either estimates or historical figures that do not reflect the latest valuation. Although all information and opinions expressed in this presentation were obtained from sources believed to be reliable and in good faith, no representation or warranty, express or implied, is made as to their accuracy or completeness. The information contained herein is not a substitute for a thorough due diligence investigation. Past performance is not indicative of and does not guarantee future performance. Exit timelines, prices and related projections are estimates only, and exits could happen sooner or later than expected, or at a higher or lower valuation than expected, and are conditional, among other things, on certain assumptions and future performance relating to the financial and operational health of each business and macroeconomic conditions.

The Family Office makes no representation or warranty, express or implied, with respect to any statistics or historical or current financial data, whether created by The Family Office through its own research or quoted from other sources. With respect to any such statistics or data delivered or made available by or on behalf of The Family Office, it is acknowledged that (a) the investor takes full responsibility for making its own evaluation of the materiality of the information and the integrity of the quoted source and (b) the investor has no claim against The Family Office.

Amounts in currencies other than the US Dollar are translated using prevailing market rates as calculated by The Family Office or its service providers and may differ from the rates used by banks. The rates are indicative only and do not reflect the rates at which The Family Office would be prepared to enter into any transactions with other parties.

Certain information contained in this presentation constitutes “forward-looking statements,” which can be identified by the use of words such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “plans,” “estimates,” “intend,” “continue,” or “believe” or the negatives thereof or other variations thereon or comparable terminology. To the extent this presentation contains any forecasts, projections, goals, plans and other forward-looking statements, such forward-looking statements are inherently subject to, known and unknown, significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond The Family Office’s control and may cause actual performance, financial results and other projections in the future to differ materially from any projections of future performance, results or achievements expressed or implied by such forward-looking statements. Investors should not place undue reliance on these forward-looking statements. The Family Office undertakes no obligation to update any forward-looking statements to conform to actual results or changes in The Family Office’s expectations, unless required by applicable law.

The Family Office makes no representation or warranty, express or implied, with respect to any financial projection or forecast. With respect to any such projection or forecast delivered or made available by or on behalf of The Family office, it is acknowledged that (a) there are uncertainties inherent in attempting to make such projections and forecasts, (b) the investor is familiar with such uncertainties, (c) the investor takes full responsibility for making its own evaluation of the adequacy and accuracy of all such projections and forecasts so furnished to it and (d) the investor has no claim against The Family Office.

This presentation represents a summary of certain information, the full terms of which are contained in a Private Placement Memorandum that should be reviewed for a more complete understanding of the investments and their risks. In addition, this presentation does not constitute an offer to sell, or a solicitation to buy, any instrument or other financial product, nor does it amount to a commitment by The Family Office to make such an offer at present or an indication of The Family Office’s willingness to make such an offer in the future.

The Family Office is a Category 1 Investment Firm regulated by the Central Bank of Bahrain C.R.No.53871 dated 21/6/2004. Paid Up Capital: US$ 10,000,000. The Family Office only offers products and services to ‘accredited investors’ as defined by the Central Bank of Bahrain.

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About The Family Office

Since 2004, The Family Office has been the wealth manager of choice for more than 500 ultra-high-net worth families and individuals, helping them preserve and grow their wealth through customized solutions in diversified alternatives and more. Schedule a call with our financial experts and learn more about our wealth management process.


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