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Strategic approach to investments
 
Investors are well aware that the chance of meeting their long-term investments goal  are maximized not   by chasing the latest market theme or the hot manager quarter by qurater, but rahter by defining and sticking to appropriate strategies over and extended period. Such strategies can position a portfolio to   benefit from the long-term forces in the market, enabling investors to benefit from  differenet risk-   retunr trade-offs as they seek higher returns thatn cash.
 
The foundation of such and approach lies in "Asse Allocation". Asset allocation is the process of   combining different asset classes (in varying proportions) in a portfolio in the perimeter of one's goal.   The Asset allocation desision is an important factor in determining the return and the risk of an   investment portfolio.
 
Ever asset class has different characteristick and its response to market changes may vary.   this makes due diligence indispensable while choosing assets, allocating monetary resources to each asset and determining the time for which each asset is to be held for the porfolio. An investor's financial needs, the length of his investment horizon, and  his appetite for risk influence the asset allocation decision. A wise and well researched asset allocation decision reduces the risk exposure  of the portfolio while maximising returns.
 
The combination of asset classes in a portfolio is the single most important factor in explaining the variability of returns of and investment portfolio.
 
Research demonstrates that asset allocation decission account for 91.5 precent of a portfolio's performance as demonstrated in Chart 1
 
Reducing Risk Through Diversification 
The most important advantage of asset allocation is the reduction of risk in a portfolio through diversification. As the   number of asset classes in a portfolio increases, the total risk of the portfolio decreases. Through diversification, the   efferct of  any individual security or asset class on the performance of the portfolio can be limited.
 
A portfolio should be diversified at two levels: between asset categories and within asset categories. So in addition to allocating investments among stocks, bonds, cash equivalents, and possibly other asset categories,   invetments should be spread withing each asset category. The key is to  identify investment in segments of each asset   category that may perform differently under different market conditions.
 
Rebalancing The Portfolio
The asset allocation decision is not a one-time decision- it is a process. As an investor's time horizon, needs and risk tolerance capacity undergo changes, the composition of the portfolio also needs to change. Asset classes to grow at   different rate of returns, and react differently to market changes; it is therefore necessary to periodically rebalance a   portfolio to maintain a target asset mix.
 
For example, in a particular portfolio, investments should represetn 50 percent of the portfolio. But after a stock market increase, stock invetments represent 75 persent of the portfolio. Now in order to reinstate the original asset allocation mix,  either some of the stock investments from and under-weighted asset category should be purchased.
 
EXTABLISHING AN ASSET ALLOCATION STRATEGY and rebalancing regularly to preserve that strategy will introduce more discipline into an investment plan.
 
While rebalancing, one also needs to review the investments within each asset allocation category. If  any of these investment are out of allignement with the investment goals, changes should be made to bring them back to their original allocation within the asset category.
 
Building Optimal Portfolios
In 1952, Harry Markowitz was the first to quantify the link that exists between the risk and returns of a portfolio, when he introduced the Modern Portfolio Theory. Markowitz's pineering approach is based on a simple principle - maximising the investor's objectives as a function of the risks being run, with the latter being measured by the volatility of the assets.
 
The Effecient Frontier is a series of points that models the range of possible portfolios, each representing the highest returning combination of investments for a specified level of resk. Each point along the Frontier represents a combination of asset cflasses that can, in theory, provide  the highest level of return for an individual  investor's specific risk tolerance, Similarly, it also depicts the lowest lever of risk to help achieve a desired return target (Chart 2).
 
Rewards of Asset Allocation and Rebalancing
Asset allocating and rebalancing play important roles in achieving   and maintaining diversified  and disciplined investment portfolios.   These relatively straightforward investment strategies can provide investors with a number of potential benefits.
 
A diversified portfolio can  experience reduced investment risk   because the growth opportunities presented by a collection of   securities, The  performance of one laggard investment will not   affect the  entire portfolio. Investment in a selection of securities spread across different asset   classes builds a portfolio that may help reduce volatility  in turbulent times, A well  diversified portfolio can provide investors with the   opportunity for growth with less portfolio volatility.   It is nearly impossible to time the performance cycles of different   investment categories. Establishing an asset allocation strategy and   rebalancing regularly to preserve that strategy will introduce more   discipline into an investment plan.
 
Conclusion
Portfolio asset allocation accounts for the majority of variation in investment returns, therefore research efforts should be focused on monitoring and adjusting asset allocation rather than market timing or security selection. Effective tactical asset allocation process adds value in the longer-term by applying temporary tilts and changes of emphasis to the portfolio's strategic asset array withing agreed boundaries.
 
 
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