Asset Allocation - Essay Example

ASSET ALLOCATION By: NAME PROFESSOR INSTITUTION COURSE DATE Asset Allocation According to Blankson (2005).Asset allocation is an act where the state trustees spread or diversify their investments in a wide range of different classes of assets and different geographical regions. This is aimed at minimizing the risks associated with the investments. These risks include falling values of investments at the same time. This allocation is also meant to give the trustees the potential for returns that are required at levels where volatility can be tolerated. The importance of strategic assets allocation is that it has been proved to be the most effective method when the assets chosen rises and fall in values independently. This implies that their prices are not directly correlated. Thus by choosing to allocate this asset in different markets and geographical areas, a few of the assets will be affected by fluctuating market conditions and this trustee will still have other assets doing well in the market (Gibson, (2008). Asset allocation also provides the best platform for doing business by trustees. For instance, when the trustees are trading in bonds, when the prices of these bonds are low, they can embark on buying a lot of bonds and keeping them for future business when the prices are better (Kowollik, 2012). When the time come when this prices of bonds are very high, the trustees can sell them which would result in very high profits. Also, they can also embark on buying shares at low prices and also selling them when the price rises too. In this regards, Asset allocation is imperative to trustees who want and interested in maximizing their wealth. Investment Strategy Investment strategy emphasizes on trustees capital appreciation as their primary objective in carrying out their investments. This, therefore, seeks to allocate the assets with substantial weighting in stocks and also to have a much smaller allocation to the fixed income and cash. These strategies also aim at producing the best investments outcomes for the trustees due to their lengthy horizon and to safeguard them from short-term investments fluctuations. Thus by investing in many investments, one have a chance of withstanding market risks the reason the trustees have four investment strategies (Fraser-Sampson, 2006). Having four investment strategies, the trustees can eliminate or reduce the risks since there are options to turn to in case one of the investments does not produce the desired results and in turn leading to maximizing their returns. Moreover, capital preservation will be achieved since capital appreciation will be witnessed in the investments that do well. This implies that the capital maintenance will allow the investors to protect the capital they have by investing it in the four investments. Stanyer (2014), in his work, depicts that investing in different investments in different geographical regions reduces risks when compared to investing in a single investment. This also enables hedging of the trustee’s portfolio due to the employment of diversification techniques witnessed in four investments. From this perspective, the default choice for employees in the four investment strategies will be the cash strategy since with this strategy, the earning rate is expected to be 80% with the probability of exceeding CPI+0.75% over a period of three years. Most importantly, this strategy is very low when it comes to its riskiness. Changes in Strategic Asset Allocation The rationale that brings about the change in Asset allocation decisions falls in some categories. This category seeks to explain the reasons why the trustees may decide to change their asset allocations. It is necessary to modify the assets allocation because of fluctuations in their values. This variation causes portfolio change that is very risky. So to rebalance the portfolio to adapt to such assets dynamics, assets allocation should be changed. The rationales of Buy and Hold and constant mix have will be the base of the trustee’s ideas to change the asset allocation. This seeks to explain that some allocated assets have different outcomes both in the long term and short term periods. Looking at both the terms, the trustees can realize that some assets best fits and more profitable in the long term yet it has been allocated shortly. Consequently, it may be found that the asset may perform well in the short term than in long-term allocation. This makes it necessary for the changes in assets allocations to occur so as to increase and possibly maximize the returns from these assets (Campbell, & Viceira, 2002). Furthermore, sometimes the allocated assets face economic turbulence that is as a result of volatile markets. This poses serious risks to the trustee’s assets. Continuous hostile markets regarding the assets will force some strategic plans to be made so as to salvage the assets from the deteriorating markets (Darst, 2008). In this regards, the trustees have the best options for changing the assets allocation whether geographically or by trading the assets. Moreover, the rationales which lead to the change of asset allocation by the trustees is the buy and hold strategies which seeks to explain the concept of buying the assets with the available capital and holding them for a period of time when the market will have risen to be sold again. In this regard, the assets bought are held, and there is no need for rebalancing. This implies that there is a very minimum risk associated with this. However, if the market stabilizes, and the new businesses enter the assets markets, the price may be driven lower than expected which is also precarious. However, mostly, it has proven to be efficient and resulted in an increase in the returns from the sales of these assets. Constant mix strategy seeks to emphasize the way the assets allocation can also be changed. In this technique, the trustees can decide to maintain certain percentages of assets in different markets. For instance, it can be decided that forty percent be invested in the bills, another forty percent be invested in the bonds and the remaining twenty percent be invested in shares. When the prices of the shares fall, it means that the twenty percent shares have reduced, hence, to maintain the original percentage, a trustee should decide to minimize the percentage of the bonds and bills to cover up for the declined percentage of the shares (Poitras, 2010). By this, the market will be balanced, and the process will prove to be producing the desired returns when the market picks up. Harry Markowitz Optimization Theory Harry Markowitz optimization theory seeks to come up and justify ways in which a selection of the most efficient portfolio for a given securities are done. It clearly depicts that, in choosing securities that do not move together, and then a risk can be reduced. This model is based mainly on the Mean- Variance since it is based on the expected returns and the deviations resulting from these chosen portfolios. This theory of Harry Markowitz is very appropriate in assessing the rationale for the pooled funds since it methodology is aimed at reducing the risk connected to the investment, and this is done by using various investments to increase the returns. Moreover, it seeks to give choices on choosing the less risky investment by giving different portfolios (Fabozzi, & Markowitz, 2011). This is very appropriate as the investors seek to increase returns on their assets and not to make losses. Other than Harry Markowitz theory, investors can use the Capital Assets Pricing Model (CAPM) which will help them to assess their expected rate of returns on the assets they invested. This model is also appropriate since it take into the account the assets sensitivity to diversifiable risks that are mostly associated with the markets and the economic changes. It also seeks to give the trustees the expected risk in the market chosen and also offer advice to these investors on the cost of the equity capital. Also, the Capital Asset Pricing Model approaches the issues to do with the arbitrage pricing theories and offers solutions based on a simple and utility of handling such situations (Liu, & Kolari, 2013). Changes in fund performance Changing the fund performance of the assets will result in some favourable and sometimes unfavourable conditions. For instance, changing the fund performance can lead to an increment of the financial and human capital. This is because the trustees will seek to solve the issues that affect the investment returns. This is aimed at focusing on the improvement of sustainable financial and measurable challenges in the market. It thus therefore complements the investments by offering financial and human capital in delivering and working toward their goals. Additionally, changing the fund’s performance provide room for increasing the options for value-driven investors and trustees on increasing their returns on investments. This is achieved through investing in the investments that have proved to be very productive and, therefore, have surely of getting much profit from it (Kleintop, 2006). In this regard, therefore. The investment impact will have a choice of aligning and possibly increasing their wealth specifically for their assets. Moreover, the change in fund performance leads to a potential for diversification. In this case, the funds may be diversified so as to increase the financial outcomes. As the investment diversifies becomes the mainstream, and then the track records are developed, the impacts can be seen. The diversification of the fund's performance aims at maximizing the trustee’s wealth and, on the other hand, increasing the value of the assets and reducing the risks attached to it. This can be achieved by combining the improved risk portfolios leading to achievement of the significant financial returns. Consequently, changing the fund performance leads to potential growth in the business since the investments aim at identifying the solutions that have been posing challenges to the investments. This implies that there are chances of identifying the new investments areas and markets which will prove to have stability and thus the possibility of the investment doing well in there. In addition, in an adverse economic condition, the investments will focus on addressing the needs of the real economy and thus the outcome is the continued market strength and thus continuous returns on investments (Campbell, & Viceira, 2002). Most importantly, changing fund performance results in a spectrum of capital that provides the trustees for investing in different projects. This implies that the investors will also be driven by the community and ethical needs to handle the entire environment in which they operate. In this regards, motivations can be achieved from other recognized investors who are done by factoring the social, environmental and the governance risks that are associated with the investment decisions. Moreover, the ability to protect the value of the greater and longer financial returns from the investments is established and maintained (Schneeweis et al., 2010). As a result of these, the trustees can integrate the social and the environmental factors into their investment analysis that can result to increase and growth in the approaches to the favouring market opportunities that can perform better. In turn, sustainable investing centres can be built by backing business practices and distinguishing between the responsible practices and reduction of risks involved which at last leads to increment in the investment returns. Investing with State Trustees The issue of investors investing on the state trustees is not a good idea. This is because of some reasons that make the state trustees vulnerable to the changes in the economy and the governance involved. Investing in it solely will make the investors vulnerable to some unforeseen risks that might emanate from day to day operations. In this regard, therefore, the investors apart from investing in the stated trustees, they should also invest outside with available alternate investment schemes for some reasons which include; Investing only in the state trustees will make the investors risk their personal money for potential gains. This is because; these investors will be willing to take their risk by using their personal finances and invest with the state trustees. In the state trustee’s investment, they engage in selling and buying of shares that may sometimes experience negative returns that imply that the investor’s money is lost. So, investing in many investment schemes apart from the state trustee, will automatically reduce this risk of becoming vulnerable to economic changes and its adverse effects (Learners2succeed.com Inc, 2012). Still in the matters of being vulnerable to the risk associated with investing only in the state trustees, it is evident that the there is a greater risks in losing the money invested in there. This is because, the state trustees prices have been associated with issuing the state's earnings. In a case when the state is experiencing financial challenges, the price of the assets in their declines rapidly which makes the assets to be market volatile. This implies that the asset invested will make a loss. In this regards, the majority of the market will experience the losses and leave their markets due to these adverse economic factors (Cotter, 2011). If all the investor’s shares were invested in this state trustee, it would then be difficult to sell these shares or even transfer the shares to another person. The only outcome is the loss. In addition to that, investing in the state trustees is a time-consuming task and more like playing a lottery. This is because, when one has invested there, a thorough research needs to be done first before embarking on investing. This research is meant to find the potentiality of making a profit in case ones invest in it. For investors, investing in these state trustees is time-consuming as they must find time to monitor the progress of the stocks invested in the trustees. With the fact that investors like implementing in long-term strategies, they should be able to know when to exit from the investment. This is difficult with the state trustees since many procedures will be followed when eating. In this regards, therefore, investors should invest in alternative investment schemes. Furthermore, it been noted that the state trustees and other investments schemes are subjected to high levels of volatility. This implies that the market of the investor’s assets goes up and sometimes goes down. In this notion, investors are only interested in the market going up since this will result in maximization of returns (Davidson, 2002). For the state trustees, it has been associated mostly with the market going down due to some factors ranging from mismanagement and poor strategic marketing. Thus, for investors to avoid this loss, they should invest in the alternative schemes of investments apart from the state trustee’s investment scheme. Investing in state trustees has been proved not to be suitable for provision of good retirement income. It is logical that the individual will retire from active activities at some day in the life and needs regular income to continue providing for oneself the basic needs of life. With the states trustees, they provide this by selling the shares of the stock of the individuals. This implies the reduction in the commission-incurring portfolio. Moreover, a drop in the market prices will reduce the total capital investment which the retired person had as the source of income. In this regards, it means that the personal assets in the states trustees market will at last lead to tight finances. Thus, it is better for investors to invest in different schemes for the sake of their future when they retire. With the state trustee’s investment, there is risk of ownership because when the state declares bankruptcy, the investors who had invested in them are on the last line to receive their money if there are any proceeds resulting from the breakups of these state trustees or reorganizations. Mostly, if-if goes bankrupt, the investors will only be guaranteed of their shares and no profits attached to it (Brott, 2007).Investing in alternatives schemes leads to investors becoming secure of their assets in case of anything arising. References Blankson, S. (2005). Asset allocation: the key to financial security. [Place of publication not identified], Samuel Blankson. Brott, R. (2007). Basic principles of conservative investing: 9 principles you must follow. [United States], ABC Book Pub. Campbell, J. Y., & Viceira, L. M. (2002). Strategic asset allocation portfolio choice for long-term investors. New York, Oxford University Press. Cotter, J. (2011). Cotter on investing: taking the bull out of the markets-- practical advice and tips from an experienced investor. Petersfield, Hampshire, Great Britain, Harriman House Ltd. Darst, D. M. (2008). The art of asset allocation principles and investment strategies for any market. New York, McGraw-Hill. Davidson, A. (2002). How to win in a volatile stock market: the definitive guide to investment bargain hunting. London, Kogan Page. Fabozzi, F. J., & Markowitz, H. (2011). Equity valuation and portfolio management. Hoboken, N.J., John Wiley & Sons. Fraser-Sampson, G. (2006). Multi asset class investment strategy. Chichester, England, Wiley. Gibson, R. C. (2008). Asset allocation balancing financial risk. New York, McGraw-Hill. Kleintop, J. (2006). Market evolution how to profit in today's changing financial markets. Hoboken, N.J., John Wiley & Sons. Kowollik, P. (2012). Strategic Asset Allocation and International CAPM. Munich, GRIN Verlag GmbH. Learn2succeed.Com Inc. (2012). Stock market investing for beginners how to increase your wealth in uncertain times. Toronto, Productive Publications. Liu, W., & Kolari, J. W. (2013). A New Asset Pricing Model based on the Zero-Beta CAPM: Theory and Evidence. Poitras, G. (2010). Valuation of equity securities: history, theory and application. Singapore, World Scientific. Schneeweis, T., Crowder, G. B., & Kazemi, H. (2010). The new science of asset allocation risk management in a multi-asset world. Hoboken, N.J., John Wiley. Stanyer, P. (2014). Guide to investment strategy: how to understand markets, risk, rewards and behaviour. Read More