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2007 3rd Edition (Other Editions)


An asset allocation strategy may be developed to provide diversification among different investment categories, such as equity, debt, cash, international investments and real assets, such as gold and real estate.

By allocating a fixed percentage of the total portfolio to each category and then maintaining those percentages with subsequent investments, the investor may realize an averaging effect.

The strategy is designed to benefit by investing more in the categories that have relatively underperformed in the preceding period. Often these categories gain strength in the later stages of the market cycle.


The illustration below shows how a hypothetical $100,000 allocation plan could work. Assume an investor had made the following investments and was considering re-allocation based on the increased current portfolio value:

Forty percent of the current value, $113,000, is now about $45,200 and 20% of that is about $22,600.


Following our proposed model, we reallocate the money among the funds to achieve the original percentages - taking $2,800 out of the stock fund.

Of this, $1,200 would be placed into the bond fund and $1,600 into the gold fund to achieve the original balance.


The same principles apply when new money is invested into the account. Assume the same $113,000 account value. Our investor now has a $10,000 quarterly deposit ready to be allocated to the program ($10,000 + $113,000 = $123,000). Forty percent is $49,200 and 20% is $24,600.

Following the Investment Allocation model, we would then allocate $1,200 to the stock fund, $5,200 to the bond fund and $3,600 to the gold stock fund, thereby returning the portfolio to the original desired allocation percentages.


Important benefits may be realized by following this asset allocation method: disciplined investing, averaging down by investing more in the categories that have appreciated less and maintenance of the asset mix determined to be appropriate for the investor's individual objectives and prudent diversification.