Asset Allocation

What was once called a portfolio’s “balance,” we now call “asset allocation.” The three traditional allocation categories are stocks, bonds and cash. Asset allocation has become much more complicated in recent years as categories have proliferated and knowledge of its importance has increased. In 1986, a major study (Brinson, Hood and Beebower) showed that asset allocation had a greater impact on long term performance than any other single factor. This means that, when building a portfolio today and seeking to understand its risk and return, decisions in the following areas of allocation matter most:

1. How much investment should be made in stocks and how much in bonds?
2. How much in domestic stocks, international stocks and real estate stocks?
3. How much in stocks of large companies and how much in small companies?
4. How much in “alternatives” such as commodities, metals, private equity, etc.?

We call these different groups of investment “asset classes,” and at DHR, we work carefully with clients to determine the blend that makes the most sense for their situation.

In addition, for most investors, another form of allocation can create benefits, by avoiding unnecessary taxation, as different asset classes create different tax consequences. Allocation of particular investment classes to an investor’s different tax entities will have an impact on long-term accumulation of after-tax wealth. Tax entities include employer-sponsored retirement plans, personal IRA accounts, irrevocable trusts, and personally owned investment accounts.

According to each client’s investment time frame and consistent with each client’s risk tolerance, DHR considers all forms of allocation in order to create the optimal blend of investments to achieve the client’s desired after-tax wealth.