The Asset Allocation Process and Sample Portfolios

Financial analysis: Analysis entails information gathering. It is similar to getting a checkup at a doctor’s office where a number of tests and measurements are run such as a blood test, weight and height measurements, urine analysis, blood pressure, temperature, stress test, cholesterol, and other important diagnostics. Financial analysis starts with what an investor owns at a given point in time. How are your assets allocated? Investors frequently candy-coat this financial information just like when they tell white lies to a doctor who asks any of the following question, “Are you watching your weight? Are you exercising? Are keeping a control of your smoking? How is the drinking? When is the last time you had any alcohol? Are you eating proper?” The number of patients that answer these questions honestly are a very small minority. Investors need to be completely honest not only to themselves but also with the financial advisor seeking information about their financial health. If an advisor does not have all the facts (similar to a patient lying to his or her doctor), the results will invariably be poor. Distorting the truth will only harm an investor in the long run. Facts are important. What is your age, annual income, needs, objectives, investing experience, time horizon to invest, liquidity needs, tax status, net worth, existing assets, risk tolerance, and any other pertinent information? These questions need candid answers.