Asset Allocation Models

The different models of asset allocation take under consideration the following issues:

1. growth
2. income
3. balance
4. preservation of capital

The following are the most common models of asset allocation.

Model #1 Capital Preservation Portfolios

In case you don't want to lose any percentage of principal value by retrieving money within twelve months when in need, Model 1 is the choice you should make. It represents capital preservation that secures capital gain from premature withdrawals. If you are about to purchase a house or pay the university tuition of your children, you should choose this model of asset allocation. The types of portfolios under the preservation of capital model are approximately eighty percents composed of cash and cash equivalents. The latter can be commercial paper, money markets and treasuries. However, there is the probability of the returns not to keep up with the levels of inflation. This may result in a reduced purchasing power of the holder of the portfolio.

Model #2 Income Portfolios

Under the second model of asset allocation, investors search for investments that earn income. The portfolios of investors under the income model generally consist of investment-grade, fixed income obligations of:

• large and profitable corporations
• treasury notes
• real estate (such as REITs)
• blue chip companies' shares (these should display a history of steady payments of dividends.)

Some of the investors that fall in this category are those who have received an inheritance near retirement or widows. The latter will mainly consider this model of asset allocation suitable for it will provide her with a source of income for the meeting of her and her children daily needs. In this way she will insure herself against the loss of principal.

Model #3 Balanced Portfolios

A portfolio under the balanced model represents a compromise between the growth and income models of asset allocation. For those investors who are emotionally unstable and risk averse, the balanced model of asset allocation provides the highest degree of benefits. Under this model, a balance between long term growth and current income is achieved. Small fluctuations over time and moderate appreciations are achieved through the right combination of assets. Division of assets is also established between stocks of leading companies that distribute dividends and obligations of medium-term investment fixed income character. The managers of this type of asset allocation rarely keep cash or cash equivalents. This means that balanced portfolios are generally vested. An exception is made when there are profitable opportunities with a moderate risk level.

Model #4 Growth Portfolios

As compared to the capital preservation model of asset allocation, the growth portfolios' main goal is the accumulation of wealth. This type of portfolio is appropriate for young employees who already have a stable income and thus do not need an investment to generate current income. This is so since their salary is the main source of covering their daily necessities and expenses. Generally, growth portfolios include common stocks, most of which don't earn dividends. The investor, who holds a growth portfolio, is given the opportunity to deposit additional funds and thus change his/her position whenever needed. Unfortunately, growth portfolios don't perform well under the conditions of a bear market. However, they enjoy excellent performance under the conditions of a bull market. This type of asset allocation is characterized by the often inclusion of international equities that serve the purpose of alleviating declines in the US markets.

Finally, having in mind the different types of asset allocation portfolios, it is up to you which one will most effectively meet your needs and financial situation.

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