Wednesday, January 25, 2006

Asset allocation basics: Part I Preamble

Volumes have been written on the topic of asset allocation intended for both academic and mass consumption. I’m probably showing indeference by attempting to cover this topic in a blog, so please don’t take this to be anything but a personal, distilled impression of the vast literature out there. Besides the recommended readings at the end, there are three internet resources I can’t rave enough about: by Paul Merriman, a money manager based in Seattle; Index fund advisors, another money management firm utilizing DFA products (check out their eBook here); and Money Chimp, a treasure trove of information that presents technical material in a remarkably clear and succinct manner.

Before I start, I need to make it clear that the asset allocation I’ve been talking about is strategic asset allocation , as opposed to tactical asset allocation (TAA) which is an active management methodology.

The basic ingredients for establishing an asset allocation portfolio are fairly simple: a) determine a mix of asset classes based on investment goals and risk tolerance; b) select the best performer(s) in each class; c) allocate funds to each and HOLD them; d) periodically re-balance and re-adjust asset mix as investment goals evolve. I’ll address them one by one in a series of follow up posts.

Part II >