What Is Asset Allocation?

Asset Allocation, Diversification, and Your Portfolio

First Published: ADawnJournal.com March 3, 2010

Asset allocation is an investment strategy which simply entails allocating your assets (your investment portfolio) among different categories of investments, such as stocks, bonds, money market funds, cash etc. Asset allocation helps to minimize risks and maximize gains because it diversifies your portfolio among various types of investment or investment products instead of keeping them in one place.

What Types of Asset Allocation Will Work Best For Me?

Although there are many rules of thumb regarding asset allocation, no one can tell you exactly which one is right or which one is wrong for you – as this is a very personal matter which largely depends on various factors as described below:

·   Time Horizon: Time horizon is how much time you have ahead of you to invest in reaching your financial goals. An investor with a longer time horizon has time on his side and will be able to choose volatile or riskier products for maximum returns – because if markets go down, this investor can wait to ride out the volatility. On the other hand, an investor with shorter time horizon will not be able to afford risky product, as he will not have the luxury to wait for the market to go up if he falls into financial meltdown.

·   Risk Tolerance: Risk tolerance is your ability to take risks for better returns. In the investment world, risk and reward are inextricably entwined. If you are young (like in your 20s or 30s), you may not care that much about losing 35% of your value, as you know you have a long way to go. But when you are in your 40s or 50s, with kids’ education and retirement in mind, a 20% drop in your portfolio may be enough to lose sleep at night.

·   Investing Is An Ongoing Learning Process: In my book Invest Now, I have mentioned that investment is nothing but a discipline, and it has to be orchestrated with great passion and care. Investment is not like going to the shopping mall and buying a few things impulsively – it is a lifelong learning process. Asset allocation or any other investment ideas are not set in stone and these will change as time changes. Always upgrade yourself with financial changes in the broad global perspective and you will have to change your investment strategies to bridge the gap between the present and the future.

·   Individuality Counts: Although you will find there are many rules of thumb or pre-made portfolios when it comes to asset allocation, there is no single allocation or portfolio available that will be right for everyone. Everyone is different and so should be their asset allocation. The onus is on you to find out the best asset allocation that suits your needs.

What Are Some Major Asset Categories?

These days, a wide array of investment products exist to give you a wide range of asset allocation with a broad diversification. However, there are only three major asset categories I will mention here:

·   Equities or Stocks: The word “stock” is interchangeable with “share,” “equity,” “security” and so on. Stocks represent ownership in a company and historically offer the greatest risk and highest returns among other asset groups mentioned here. Stocks should not be used as a short term investment as it can be very volatile to hold for a short period of time.

·   Fixed Income Investments or Bonds: Some other fixed income investment products are government savings bonds, bond mutual funds, etc. These types of products are less volatile than equities and offer modest returns as well. Fixed income products can offer steady flow of income – depending on its objective.

·   Cash Equivalents or Cash: This can be plain cash or products like savings accounts, money market funds, treasury bills, etc. These are considered the safest investments with minimal returns with almost no risks.

Why Asset Allocation Works?

Due to economic and market conditions, no one can predict the best performing assets and it varies year to year. Time has proved that during bad and good economic times, all asset classes do not move in the same direction. By diversifying your assets among various categories, you are minimizing your risks. If one asset class goes down, the other asset class is there to protect you by averaging out. Also, to reach your financial goals, you need to balance your portfolio by keeping both high-return and low-return investment products. If you keep only one type of product in your portfolio, you may never be able to reach your investment objectives – as it will be either too risky or too safe. Asset allocation helps you to diversify and balance your portfolio.

What Are Some Common Asset Allocation Rules of Thumb?

There are so many rules of thumb on this topic that it can be overwhelming. Many consider a neutral asset allocation should be 60% stocks and 40% bonds. Another rule of thumb goes like: subtract your age from 100 and you will get the percentage to hold in stocks. For example, if you are 40, 100-40 = 60% of your portfolio should be in stocks and 40% should be in bonds.

Is Diversification Same As Asset Allocation?

The old saying “Don’t put all your eggs in one basket” was good advice 100 years ago, and it will be good advice forever. Whether you are a first-time or a veteran investor, you always need to spread out your investments to minimize your risks. Diversification refers to the process of spreading investments among various equities. Asset allocation refers to the process of spreading investments beyond multiple equities and over several asset classes such equities, bonds, cash, etc.

Asset Allocation is a diversification strategy that helps you to offset decline in any particular asset classes by gains in other asset classes – thus reducing the fluctuations of performance of a portfolio. It is unlikely that all asset classes will go downhill at the same time.

Do You Have Your Own Asset Allocation Model Portfolio?

Yes, to make investing simple and worry-free, I have invented a model portfolio called “A Dawn Timeless Portfolio” or simply ADTP. You can read more about ADTP here – (I am still working on this project and will add a link once done)

To find many other online asset allocation calculators, do a search by entering these keyword phrases: “asset allocation calculators,” “portfolio asset allocations tools,” etc.

Last Word

Model portfolios and asset allocation tools are to help you understand asset allocation. Do not blindly follow any model portfolios or tools just because it looks cool. You are different than anyone else – make an educated decision based on your time horizon, risk tolerance, financial goals, and your overall financial situation.

Australia Travel Blog: Sydney City Tour | Mrs Macquarie’s Chair

Sydney Travel Blog: Part 5 | Mrs Macquarie’s Chair

2-Day Combo: Sydney City Tour + Sydney Harbour Lunch Cruise and Blue Mountains Day Trip

Sydney Travel Blog: Part 4 | Sydney Downtown

After completing The Rock tour, my tour bus started to pass through some of Sydney’s highlights. Points of interest were St. Mary’s Cathedral, Royal Botanic Gardens, Hyde Park, Sydney Opera House, Darling Harbour, Kings Cross and so on.

I took some pictures and videos from the bus, but the bus was in motion, which made it challenging to take shots.

The next stopover would be Mrs Macquarie’s Chair, also known as Lady Macquarie’s Chair. This is a hand-carved bench made out of rock by convicts in 1810. This place is like a park (near the Botanical Gardens) overlooking Sydney Harbour and this is a point where you have a clear view of the Sydney Opera House and Sydney Harbour Bridge together.

Tourists are always flocking here to get a picture perfect, iconic view of Australia and Sydney. I took some great shots and videos here, although I had to sometimes maneuver to get to the edges of the cliff and sometimes climb a little uphill. But in the end, I was able to capture what I was looking for.

The reason this place is called Mrs Macquarie’s Chair is because Mrs Macquarie was the wife of New South Wales Governor Major-General Lachlan Macquarie and she used to come here and sit on the rock to watch ships coming from Great Britain.

Although it was a hot day, it felt cooler and nice by the ocean and I felt like staying there all day relaxing.  Soon enough, my time was up and I had to return to the tour bus. We will be heading towards the famous Bondi Beach.

What Is Inflation?

Inflation: Definition and Causes

First Published: ADawnJournal.com March 7, 2010

When there is economic trouble, you often hear about inflation. Inflation is something that many people know about, but few people actually understand. Yet, inflation plays a very important part in our lives. If not for inflation, everything would still cost a few cents, but because of inflation the price of a can of Coca-Cola has gone from five cents to over a dollar.

Essentially, inflation is the rise in the price of goods and services over a period of time. Some define inflation as the loss of purchasing power because when a price level rises, the unit of currency (the dollar for example) buys few goods and services. While in the past one dollar could buy a lot of things, these days it buys barely a can of Pepsi.

Governments around the world, as a result, pay a great amount of attention to the inflation rate, which is the percentage change in the price index over time.

Inflation is not all bad of course. There are both good and bad effects of inflation that should be understood. The good things about inflation include the fact that it prevents recessions and provides debt relief by lowering the real level of the debt. In addition, it helps to eliminate expensive debt since the value of the dollar changes over time. However, there are some bad points and they include lowering the economic productivity rate, cause shortages of goods and services and reduce the investment in capital that helps keep an economy going.

Canada has gone though many different levels of inflation during good and bad times. For example, between 1966 and 2004, the country reached an extreme low of level of inflation in 1994, when it was near zero, while in 1974 the inflation rate went past 14 percent. This just shows how much the inflation rate can shift for a country during good and bad times.

High inflation is caused by huge growth in the supply of money, while low inflation is caused by small fluctuations in the demand for goods and services. The growth of inflation at a steady rate over time is usually attributed to the growth of an economy. For example, the United States had its economy grow slowly between 1900 and 1950, and inflation moved slowly. However, the economy grew greatly from 1950 to 2000, which accounted for the huge increase in the price of items.

Most western countries, including most of Europe, Canada and the United States, have very low levels of inflation. This shows that these economies are relatively healthy and less volatile. The inflation rate of Canada and the United States is usually about 1.5 percent per year.  Many developing countries have a very high rate of inflation, including Afghanistan and Mongolia, which both have inflation rates in excess of 25 percent. This shows that these countries lack stability and have a very volatile economic situation. As well, the worse the inflation, the less likely investors will invest in a currency of a country.

As for what causes inflation, this is much harder to determine. When economies are in trouble, inflation rates can increase, but they also increase when economies are doing well. Most economists have a general idea of how inflation works, but more or less it is seen as a by-product of our modern capitalistic world and something that is not completely understood, least of all by regular people

Globe Investor’s New Terrible Site Redesign and Why Is It Time to Switch to Google Finance Canada

Globe Investor’s Recent Terrible Revamped Website

First Published: ADawnJournal.com March 7, 2010

I know what you will say once see the title of this article: Globe Investor comes nowhere near comparing with Google Finance Canada and they are meant to be used for different purposes. And up to now, I have totally agreed with you. However, I have changed my mind once I actually experienced their new redesigned site last week.

It is hilarious to see these mega sites trying to put on a huge show through online advertisements and campaigns to announce their new revamped site design – and then come up with a site that is much worse and more user unfriendly than previous versions.

What don’t I like about the new Globe Investor? Basically everything. They tried to make it look like a high-tech website by putting too many nice pictures and big stock market chart; however, they forgot one main element – simplicity.

When you open globeinvestor.com, the first thing that you notice is that almost all of your screen is covered with a gigantic market summary chart and a couple of pictures. And then, if you keep scrolling down, you will be bombarded with about 15-20 sections/columns with big pictures representing each one of them. Let’s say, if you want to find your favourite sections, or any specific columns, there is no way you can find it in a snap. The front page takes about 5-6 page down to see the whole thing.

A simple test you can do right now to see how inefficient and cluttered Globe Investor is. How much time you would need to browse all sections and important highlights on mega sites like Google.ca/finance, Economist.com or IHT.com? I can do in about 20-30 seconds. How long it would take to do the same birds-eye-view scan of heavily cluttered Globe Investor home page? Give yourself an A+ if you can do it in 1 minute.

On a regular weekday, I usually browse Globe Investor 10-12 times and Google.ca/finance 2-3 times. However, starting now, I will flip it to Globe Investor 2-3 times and Google.ca/finance 10-12 times. Finding time is complicated enough and there is no point making it more complicated with the new revamped Globe Investor. Google Finance is may be miles away from Globe Investor in terms of offering features and customization, but I know it won’t take long for Google Finance Canada to catch up. After all, Google always seems to redesign and add features keeping simplicity and what readers want in mind – not the other way around.

A Brief History of India

India: A Brief History

First Published: ADawnJournal.com March 10, 2010

One of the oldest civilizations in the world is the civilization of India. Like China, it is one of the founding civilizations in human history, and it has had a profound impact on our lives for thousands of years. While it is not easy to sum up the history of a country going back thousands of years, this article will go through a brief history of this amazing land.

Pre-History of India

The first settlements in India began to appear about 9,000 years ago, and throughout the early part of the history of the country, it has been a mysterious land, but also a very spiritual one. Throughout pre-history, the country has been a strong civilization as well, even being the only civilization to beat back both the Mongols and Alexander the Great during its history.

It was during the third century BC that the country united under Asoka the Great, during a time that was called India’s Golden Age. It was during this time that India made great advances in mathematics, art, language, astronomy and religion. In fact, both Hinduism and Buddhism came from India around this time.

Europe Arrives

The country was able to keep itself an independent nation for a long period of time, but by the 16th century, the countries of the United Kingdom, the Netherlands, France and Portugal began to establish themselves around India, greatly disrupting the country. By 1856, the entire country became part of the British East India Company, essentially making it part of the British Empire. From this point on, for almost 100 years, the country would be under the direct rule of the British Empire. The country tried to fight against Britain in India’s First War of Independence, but they were not successful.

Independence

The citizens of India would continually try and push Britain out of their land for the first part of the 20th century. However, it was not until the legendary figure of Mahatma Gandhi came along and led millions of India towards independence through non-violent civil disobedience. Through this action, India gained its independence on August 15, 1947, along with the region of Pakistan. In 1950, the country became a republic and created its own constitution.

The Growing Giant

While India gained its independence, it still had problems with its neighbours. It got into a dispute with China in 1962 that resulted in the Sino-India War, and the country has gone to war with Pakistan in 1947, 1965, 1971 and 1999. However, the country is also a member of the United Nations and it is also one of the few nuclear nations in the world. In addition, the country has transformed itself through economic reforms and is now becoming a superpower along with China. Currently, the country has one of the fastest growing economies on Earth and it is expected that India will be one of the major countries of the 21st century, along the lines of how Russia and the United States dominated the 20th century.

One thing is clear, this country, which has been around in one form or another for thousands of years, shows no signs of slowing down, or going away.