How Billion-Dollar Funds Are Managed: Part 3 - The Asset Allocation Process

โดย Tanapoom Damraks | Aug 10, 2017 | view 3,378

In the previous article, we introduced the concept of Asset Allocation. In this article, we will delve into the detailed steps involved in Asset Allocation.

Steps for Asset Allocation:

Set Clear Investment Goals regarding what you want to achieve with the returns and what percentage return you aim for annually. These goals should be realistic (not overly ambitious) and align with your future financial plans.
Assess Your Risk Tolerance (without bias). Most investors tend to believe they can handle more risk than they actually can. When volatility occurs, they may find it hard to endure. Therefore, it’s essential to evaluate your risk tolerance by asking yourself if you can accept the loss of this capital if it were to disappear.
Consider Investment Constraints, such as if you will need to access a lump sum of money in the near future while your investments are still active.
Forecast Returns and Volatility of the main assets you plan to invest in, including the correlation of returns between each asset pair, whether they move in the same direction or opposite. We prefer to see asset pairs with returns moving in opposite directions, as this provides better risk diversification.
Use Assumptions from Step 4 to Calculate the Appropriate Investment Proportions (the proportions that yield the highest returns under limited risk). This step requires optimization (finding the most suitable investment proportions).
Adjust Investment Proportions According to Economic Conditions and Other Fundamental Factors. This step involves assessing the macroeconomic situation and adjusting strategies to fit current circumstances.
Select Funds Based on the Planned Proportions. For example, if you want to invest 30% of your portfolio in stocks, you should look for funds with good performance and investment policies in your desired region. This step is also crucial; even if you choose the right investment proportions, selecting poor funds can lead to disappointing returns.
Strictly Follow the Established Plan. While investing, market volatility may cause discomfort, but you must remain patient and adhere to the strategies you have set.