Asset allocation planning can range from the relatively simple to the complex. It can range from generic recommendations that have no relevance to your specific needs (dangerous) to recommendations based on sophisticated computer techniques (very reliable although far from perfect). Between these extremes, it can include recommendations based only on your time horizon (still risky) or on your time horizon adjusted for your risk tolerance (less risky) or any combination of factors.
Computerized asset allocations are based on a questionnaire you fill out. Your answers provide the information the computer needs to become familiar with your unique circumstances. From the questionnaire will be determined:
- Your investment time horizon (mainly, your age and retirement objectives).
- Your risk threshold (how much of your capital you are willing to lose during a given time frame), and
- Your financial situation (your wealth, income, expenses, tax bracket, liquidity needs, etc.).
- Your goals (the financial goals you and your family want to achieve).
The goal of the computer analysis is to determine the best blend of asset classes, in the right percentages, that will match your particular financial profile.
At this point, the "efficient frontier" concept comes into play. It may sound complex, but it is a key to investment success.
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