Steps in the Asset Allocation Process

Here’s a step-by-step approach to the asset allocation process. This process is adapted from a version found in Personal Financial Planning – Seventh Edition by G. Victor Hallman and Jerry S. Rosenbloom. I’ll list the process and then expand where necessary with follow-up posts.

The Steps in the Asset Allocation Process:

1. Consider your personal situation. What are your investment constraints, time horizon, financial position, and tax status? These are all important things to know when deciding on the asset allocation that is best for your needs. It is also important to understand your risk tolerance.

2. Consider your investment objectives. Is your goal maximum current income, capital preservation, moderate capital growth, long-term growth, aggressive capital growth, or tax reduction through tax-advantaged investments? There’s a lot to consider.

3. Review your present allocation. Where are you now?

4. Consider and select the asset classes to be included in your allocation. Here’s a list of possible asset classes to be considered:

Domestic common stocks
Foreign common stocks
Domestic bonds (investment grade, not junk)
Foreign bonds
High-yield (aka junk) bonds
Cash-type assets (cash equivalent)
Longer-term fixed-dollar (guaranteed principal) assets
Investment real estate
Other tax-sheltered investments
Convertible securities
Gold and other precious metals
Other assets

5. Look at the long-term return-risk features of each asset class.

6. Decide on your allocation percentages of the selected asset classes.

7. Along with Step 6, decide on strategy and allocation INSIDE each asset class.

8. Decide how each asset class should be held. Should you use your 401(k), IRA, or taxable account? This is a very important step in the asset allocation process.

9. Implement the plan. Nothing happens until you implement.

10. Review your plan at least annually and make adjustements as necessary.

Several of the steps listed above need further explanation. I hope to do that in follow-up posts.

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