Asset Allocation

The importance of asset allocation is frequently overlooked in investment strategy.  Too often investors are preoccupied with a search for the next hot sector, asset class or fund manager, not realizing that asset allocation is of paramount importance.

Deciding how to allocate assets is the most important decision for an investor. Studies of pension plans and mutual funds have shown that asset allocation proves to be the most important determinant of investment return outcomes: as much as 90% of the variability in returns is explained by asset allocation.1

At Granite, we help clients determine the answer to that all-important question.  Allocation among asset classes can only be determined after evaluating a multitude of factors specific to each client.  Some of the more important of these include: risk tolerance, cash flow requirements, tax planning, time horizon and the amount of non-liquid assets held.  It’s also important to factor in a tax overlay, seeking to optimize after-tax returns by allocating assets among taxable and tax-deferred accounts and rebalancing in the most tax efficient manner.

The entire asset allocation process takes place with a client’s individual priorities and goals in mind. Only after a client’s overall profile is analyzed and understood can we develop an effective allocation plan that maximizes return for the appropriate level of risk.

[1] Gary P. Brinson, L. Randolph Hood, and Gilbert L. Beebower, “Determinants of Portfolio Performance II: An Update”, The Financial Analysts Journal, 47, 3 (1991); Robert G. Ibbotson and Paul D. Kaplan, “Does Asset Allocation Policy Explain 40, 90, or 100 Percent of Performance?”, The Financial Analysts Journal, 56, 1 (2000).