Asset allocation is the key to wealth management. My book “On Wealth and
Nobility ” puts forward: there is a way to be rich and rich, there is a way to be rich, and there is a way to be rich when you are one. There are five ways of getting rich, namely the way of appreciating wealth, the way of seeking wealth, the way of creating wealth, the way of keeping wealth and the way of using wealth. An important part of the way to get rich is to plan asset allocation.
Asset allocation is one of the most important aspects of the investment process and a major factor in determining the relative performance of a portfolio. Relevant studies have shown that asset allocation contributes more than 90% to portfolio performance. On the one hand, in a semi-strong and efficient market environment, the information, profitability, and scale of investment targets, the characteristics of investment varieties, and special time-varying factors all have an impact on investment returns. Therefore, asset allocation can play a role in reducing risks and increasing returns. On the other hand, as the investment field expands from a single asset to multiple asset types, and from the domestic market to the international market, it includes not only the allocation between domestic and international assets, but also the handling of currency risks and other aspects. Content, single asset investment plan is difficult to meet investment needs, the significance and role of asset allocation has gradually become prominent, which can help investors reduce the unsystematic risk of single asset.
The decision-making factors of asset allocation include not only professional and accurate rational person assumptions, but also the influence of behavioral economics elements. Asset allocation is a framework concept, wealth philosophy is its skeleton and foundation, and wealth technology is its appearance and presentation.
Asset allocation should make good use of the “simple capital allocation” model.
Asset allocation is inseparable from the division of assets. The author divides assets into five categories and 15 subcategories. The five major categories are royal layer assets, holding layer assets, offensive layer assets, grabbing layer assets, and professional layer assets. The arrangement rule is: the further back, the greater the risk probability and the higher the profit space. Of course, this is only a rough division.
The first layer is “royal assets”, which mainly include real estate, insurance, banking products, etc. Its characteristics are: less risk, relatively stable income, and it is a standard asset for the public. The second layer is “holding assets”, including bills, bonds and trusts, etc., and the risks are relatively controllable. The third layer is “attack layer assets”, including stocks, funds and foreign exchange, etc., which often have higher returns and risks. The fourth layer is “grabbing layer assets”, including: commodities, options and futures, and non-standard equity assets. The fifth layer is “Bo layer assets”, including: collectibles, management rights and intangible assets. This type of asset often involves a lot of money and risks. If it is managed well, the income can be very considerable.
The five major types of assets are arranged from top to bottom. The proportion of assets at each level is different, and the total is 100%. Depending on the person and time, the proportion of asset allocation will have various forms. The author believes that there are 5 classic types, namely: Pyramid (front/reverse), dumbbell, trapezoid (front/reverse), rectangle, and olive, which can be converted in combination with Merrill clocks in different periods.
”Pyramid allocation”: It can be 5%, 15%, 20%, 25%, 35%, or other allocation ratios. The main point is that the allocation of assets with greater risk should be less, and the allocation of assets with lower risk should be more. This is a relatively conservative allocation method. Reversing the above ratio, it is the opposite situation, and offensive and game-type assets account for a larger proportion.
”Dumbbell-shaped capital allocation”: Emphasize that both ends are big, high-risk and low-risk both account for the majority, and an appropriate proportion of medium-risk. The guiding ideology of this configuration is to hedge risks at both ends and maintain stability in the middle, which is also an effective risk balancing strategy.
”Ladder-type capital allocation”: similar to the pyramid type, but the distinction is relatively gentle and the ratio is relatively close. It is also a safe way of capital allocation; inversely, it is the opposite situation, with offensive and hard-working assets occupying a larger proportion.
”Rectangular capital allocation”: It is a simple and approximately equidistant average distribution method, which is relatively simple to respond to all changes without change. From a long-term perspective, this is an effective allocation method. As long as you follow the market, you can also have profits and resist risks. Because there is a trade-off relationship between the five layers of assets in different markets, it is also feasible to make up for the apology. It is only necessary to adjust the total amount of investment for different markets. The investment amount accounts for the total investable amount. The proportion of the amount depends on comprehensive considerations such as market judgment and risk preference.
”Olive-shaped allocation”: re-allocation in the middle, gradually shrinking at both ends, this is a common allocation method, advance can be attacked, retreat can be defended, occupy the middle and keep the center, advance and retreat freely.
In the process of “simple capital allocation”, we should pay attention to the influence and interference of “mental account”. Consumers will mentally divide objectively equivalent expenditures and incomes into different accounts in reality. This is because people have different emotional preconditions for various assets and products, so they are different in terms of manipulation.
The “Simple Capital Allocation” model should be used in conjunction with the “Merrill Lynch Clock”. The Merrill Lynch clock is a method of linking “assets”, “industry rotation”, “bond yield curve” and “economic cycle”. It is a very practical tool to guide the investment cycle and can help investors identify the turning point of the economic cycle . The analysis framework of “Merrill Lynch Clock” can help investors identify important turning points in the economic cycle, and investors can realize profits by converting assets.
For the selection of assets, in addition to the 5-layer arrangement, it should also respond to economic situation analysis, industry analysis, regional analysis, enterprise analysis, etc., and really fall on specific assets, try to find familiar industries, certain regions, and familiar companies. This asset allocation is the most reliable.
Asset allocation should be matched with risk.
How to measure whether the allocation of large-scale assets is appropriate? It needs to be calculated and analyzed from many aspects. The first is to measure the matching degree of assets and risks.
The table below is an example. The 5 types of assets of the customer correspond to 5 levels of risk coefficients of 1, 2, 3, 4, and 5 respectively, and each category of assets can be divided into 5 levels of 1.2, 1.1, 1.0, 0.9, and 0.8 according to the risk level The level coefficient, combined with the allocation quantity of each type of product, can calculate 5 types of assets; the following products can be further divided into 5 risk levels, one-to-one correspondence, to calculate risk-weighted assets; then calculate the risk of each type of asset and The total asset risk is compared with the individual risk tolerance to see if it is within the risk tolerance, and if it exceeds, it must be re-deployed.
Asset allocation should pay attention to multi-dimensional overall planning
Of course , investors should consider far more than just risk, but also consider other dimensions, such as: market dimension, regional dimension, industry dimension, time dimension and model dimension.
One is the market dimension. Investors have to face the five major markets of money market, capital market, wealth management market, foreign exchange market, and alternative market, as well as many sub-markets. How should they lay out? The same category of real estate assets has different manifestations in different markets, and each sub-market is different.
The second is the regional dimension. The allocation of assets in different regions is also an effective way to avoid risks. Still taking real estate as an example, third- and fourth-tier cities may have already been saturated, but in first-tier cities, there is still room for the real estate market. As long as the flow of people and capital continues to flow in, there will still be demand and opportunities.
The third is the industry dimension. Faced with seven categories, dozens of industries, and hundreds of sub-industries, how do you lay out? The same is true for real estate, and the performance of each sub-sector is different. The upstream development may be saturated and suppressed by the policy; but the downstream decoration and improvement of supporting facilities may be less affected.
The fourth is the time dimension. Investment has a process. When to enter, when to exit, and how long to allocate, these must be well matched and arranged. The time dimension is too important, and the seasons are dynamic throughout the year. There used to be “Golden September and Silver October” in real estate. This is a seasonal factor, and of course there are policy factors, which will be reflected in time.
The fifth is the model dimension. This point is more important. Assets are reflected through different businesses and products, which are specifically related to business design models. Different models have different matching forms of income and risk. This is a problem brought about by wealth finance. There are more opportunities and more risks, which need to be well identified and prevented.
Asset allocation is the key to wealth management. My book “On Wealth and