IFM Approach: Asset Allocation

Designing and building an investment portfolio is analogous to building a home. We believe that a successful investment portfolio begins with a strong foundation, and then the basics - sturdy walls, a durable, watertight roof, windows, doors, etc. Then if money permits – the driveway, landscaping and fence. And if you still have extra money – high-end finishes, a swimming pool, hot tub, and gazebo.

In keeping with that house-building metaphor, when it comes to designing an investment portfolio, Fixed Income investments act as our strong foundation. Next we see our dividend paying Growth investments in the safer, consistently growing sectors (Utilities, Pipelines, etc.) as our sturdy walls, durable roof, windows and doors. And dividend paying Growth investments in non-cyclical sectors (Communications, Consumer Staples, etc.) are our driveway, landscaping and fence. Non-dividend paying Growth investments are our high-end finishes, swimming pools and hot tubs.

For a house, the high-end finishes, swimming pool, and hot tub may or may not enhance its market value. But a strong foundation, sturdy walls, durable roof, windows and doors always enhance its market value. The same value characteristics apply to your investment portfolio. A strong foundation built from Fixed Income investments and sturdy walls, roof, widows and doors built from strong dividend paying Growth investments will enhance the value of your accumulated savings. And non-dividend paying investments just like the house’s high-end finishes, swimming pool and hot tub, may or may not add value to your portfolio.

With this in mind, our IFM Approach dedicates a significant allocation of our accumulated savings to Fixed Income investments. For example, our Target Asset Allocation for a balanced investment portfolio would include:

    • Cash and Cash Equivalents:    0%
    • Fixed Income investments:      65%
    • Growth investments:                  35%

To guide the portfolio design and the individual investment decisions, we maintain a written and detailed Investment Policy Statement (IPS).  The IPS dictates the portfolio’s specific asset allocation, its diversification criteria for each asset category and the minimum credit and financial quality standards each individual investment must satisfy.

Member’s Note: InvestingForMe provides an IPS for each of the sample investment portfolios in the Sample Portfolios section. Refer to this section for a detailed IPS sample. In addition, you can now create a customized IPS to guide and coordinate your investment decisions by using the Investment Policy Statement template in our IFM Tools section. Once you have created your IPS, you can save it in My Folder for future reference and updating. 

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