People inevitably do not have a coherent investment strategy when selecting mutual funds for their portfolio. They skip the vital step of deriving an appropriate asset allocation decision and jump straight to selecting funds. The result is that their overall portfolio cannot be customized, is not allocated properly, does not match their needs, incurs heavy fees, carries inordinate risk and does not perform well.

Why Is Asset Allocation Important?

As a 'top down global style rotation manager', we believe it is crucial to construct portfolios according to three criteria:

Asset Allocation
Sub-Asset Allocation
Security Selection

The first and most important decision in constructing a customized portfolio is the appropriate asset allocation - how much of the portfolio should be apportioned to equities, fixed income and cash.

This is not a static decision - it is an active decision.

Criteria to assess appropriate asset allocation includes

Investment Objectives
Income Requirements
Tax Situation
Risk Profile
Investment Time Horizon
Liquidity Needs
Concentrated Holdings
Social Investment Restrictions

If the asset allocation parameters noted above are not assessed properly, it is impossible in subsequent decisions to derive appropriate sub-asset allocation and security selection.