March 14, 2008, 7:00 am

The Principle of Asset Allocation Part2

by: The Financial Blogger    Category: Investment, Market and Risk
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Yesterday, we discussed the concept of asset allocation with a few examples. Today, I will explain different ways to have an optimal asset allocation according to your investment profile. There are so many tools that you can use that it may be confusing at some point in time. In the end, the main goal is not to optimize your investment return, but to optimize your returns along with the fact that you are sleeping well at night.


Meet with a financial advisor

The financial advisor will be of great help in order to determine your investment profile. He should have a questionnaire, guidelines and a specific definition of each profile. At the end of the process, it is important to read the definition and make sure you agree with it. If it is not the case, you may want to review your answers to find out if there were any questions that were misinterpreted.

Some advisors may try to influence your choice in order to have a more aggressive portfolio. Most of them don’t realize that this is what they do. This is only a good example of the projection phenomenon where one individual takes for granted that his preferences and his knowledge are equally shared with others.

Make your own calculation

Once you have your investment profile and the suggested distribution of your assets, you may build a fake portfolio online and see how it goes for a few months. This will show you how different type of assets fluctuation with the market and the global result of your portfolio.

Go online and answer their small test

Many financial institutions offer their investment test so you can learn more about asset allocation, investment diversification and investment profile. By doing a few of them, you will have a much better view of what they can offer as products and how they would work for you.

If you can live with big fluctuations, a complete asset allocation won’t be of any goods

If you receive your statements at the end of the month and you freak out because there is a -2% at the bottom. Asset allocation won’t do much for you. It is true that it reduces the risk and smothers market fluctuations but it doesn’t mean that it is guaranteed.

If you don’t want to go on the roller coaster, you don’t have too. However, you can always take classes, read books and blogs in order to learn more about the market. Most of the time, human beings are not afraid of things that are bad for them, but they fear what they don’t understand.

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Comments

Hi FB,

When you mentioned the online tests to define my investment profile, can you share with us some of those links?

Thanks.

by: The Financial Blogger | March 14th, 2008 (7:31 pm)

Hi Gean,

Here are the ones I found:

BMO:
http://www.bmoinvesting.com/InvestorProfile/

CIBC:
http://cibc.com/ca/tools/investment-selector/investmentselector-start.html

Scotia Bank:
http://scotiabank.com/cda/eventdetail/0,1005,LIDen_SID3043,00.html
(under “Tools and Resources” on the right side)

National Bank:
http://nbc.ca/bnc/cda/feeds5/0,2480,divId-2_langId-1_navCode-14886,00.html
(6 questions)

I could not find them for TD and RBC… I guess they are hidden 😉

Keep in mind that this is only the starting point. A financial questionnaire without an advisor is like a BMW M3 without a good driver 😉