Asset Mix

Back when I was a thin young woman - ah, yes, the old days - everyone called it "asset mix." Then things were deemed to be boring and the industry came up with the sexier "asset allocation," increasing the syllable count, but changing not much else. Whether you call it "asset mix," "investment mix" or "asset allocation," it's the same thing. It means dividing your money among different types of investments and it's what you do to diversify.

Asset mix usually falls into one of three groups: conservative, balanced, or growth-oriented. A typical conservative investment portfolio might hold 20 percent in cash, 60 percent in fixed-income investments such as bonds or mortgages, and 20 percent in equities. It's a portfolio that is more interested in capital preservation and income than it is in growth.

A balanced portfolio would hold 10 percent in cash, and 45 percent each in fixed-income and equities. Investors who want both income and growth who split their portfolios fifty-fifty are balanced in their asset mix.

A typical growth portfolio would hold 10 percent in cash, 30 percent in bonds and 60 percent in equities. These portfolios are not as interested in generating income and are willing to risk far more in capital in order to potentially earn a much higher return.

I consider myself to be fairly conservative. I'm more likely to buy blue-chip stock, or a large cap mutual fund than a mutual fund that focuses on emerging industries. Yet, if you put me beside a woman who wouldn't dream of investing in anything but GICs, I look pretty risk tolerant. Stick me beside someone who considers himself conservative, but likes the technology sector and you have to ask yourself, "What does conservative actually mean?"

Determining whether you are conservative, balanced or growth-oriented is the first step in the asset allocation procedure. Take this test I designed to see how you do. You have to be dead sure that you know what's going on to stay the course with the investments you've chosen.

If you want a diversified investment portfolio, you need to spread your investment dollars over different companies, different industries and different countries. Here are five ways to diversify:

  1. By type of investments: bonds, deposits, stocks, mutual funds and real estate
  2. By quality of investment - the lower the quality the higher the return offered to offset the higher potential for loss
  3. By region (in Canada, North America, globally)
  4. By currency (Canadian dollar, U.S. greenback, Euro)
  5. By levels of liquidity, holding some long-term deposits such as stripped bonds or equity funds, along with some shorter-term investments such as treasury bills.

Your perfect asset mix is different from mine. What works for your brother won't necessarily work for you. So comparing what your holding with other people is like comparing what's in your fridge: pointless and frustrating.

Your perfect asset mix must be based on your objectives and how comfortable you are with different types of investments. However, one overriding criterion for a well-designed portfolio is that your after tax return should outpace inflation. It doesn't matter what rate of return you earn, if you're barely beating inflation your money might as well be under your mattress for all the good it's doing you.

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