So...Tell us \'what/how\' you go about asset allocation in/within your own lives

Question

So...Tell us 'what/how' you go about asset allocation in/within your own lives (if you do...perhaps via a 401k or the like) and, what advantages and pitfalls you've experienced in this process. If you've not yet addressed the asset allocation process...tell us how you would envision undertaking this process for your own personal investing decisions. Lastly...'what' similarities/differences is/are there between one's own (personal) investing and that of a professional money manager for a large, national mutual fund firm...

Explanation / Answer

For personal investing decisions, the rule I would follow is simle. I would go in for higher risk and proportionately higher returns at the younger stages of my life and move towards less risky, steady returns as I age. I would start with non-marketable Financial assets like Bank Deposits and a 401K plan. Bank Deposits, though relatively low risk, are convenient to operate. Hence, I would use them when my resources are relatively meagre for my day to day operations. My 401K plan, though long term, would be well aligned with my strategy of reducing the risk of my portfolio as I grow older. With an increase in funds available, I would diversify my portfolio to reduce the overall risk. I would progressively invest in Life Insurance Policies, Mutual Fund Schemes, Real Estate and Precious Objects. At the latter stages of my life, when I would have adequate time, I would look at Equity Shares, Bonds and Money Market Instruments.

There are a number of similarities between personal investing and that of a professional money manager of a large national mutual fund firm. Both try to maximize the Net Present Value of Investments given their Opportunity Cost of Capital. Both demand a risk premium for any risk that is undertaken.

Having said that, there are two main differences between the two. Firstly, a professional manager of a large mutual fund has access to a research team that can process a lot more information of individual securities that make up the portfolio. The individual on the other hand has to rely on the opinions of a couple of analysts as he/ she has limited time in hand. Secondly, it is much easier for the professional manager to borrow and lend at more competitive rates. This is not in violation of the efficient market hyothesis - it is just the fact that the manager and his/ her team spends all their time for scouting these opportunities, while this is not possible for an individual investor.

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