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How can you determine the right asset allocation for a client's portfolio?

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Asset allocation is the process of dividing your investment portfolio among different asset classes, such as stocks, bonds, cash, and alternative investments. It is one of the most important decisions you can make as a private equity investor, as it affects your risk, return, and diversification. But how can you determine the right asset allocation for a client's portfolio, given their goals, preferences, and constraints? Here are some steps you can follow to help you with this task.

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1 Assess the client's profile

The first step is to understand the client's profile, which includes their investment objectives, time horizon, risk tolerance, liquidity needs, tax situation, and any other relevant factors. These factors will help you define the target return and risk level for the portfolio, as well as the constraints and preferences that may limit or guide your asset allocation choices. For example, a client who wants to retire in 10 years and has a low risk tolerance may need a more conservative asset allocation than a client who wants to grow their wealth over 30 years and has a high risk tolerance.

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Priyank Kothari

Building My 2 Cents | Finance | Taxes | Strategy | Mutual Fund Distributor | ACMA | CFA all levels cleared | Kairos Fellow |
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There are many factors that should be considered while building up a client portfolio above listed are the basics that can in no way be ignored. Also most important to remember is for whom the portfolio is created many times in India parents create money baskets for their children so once the child is old enough it is important to also understand his objectives and find something in tandem and create a suitable portfolio

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Aman Soneji

MBA Candidate at HEC Paris | Ex-Goldman Sachs | Private Equity Enthusiast
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Considering a client's profile is the foundational step in going about to figure out the right asset allocation mix for a client portfolio. Too often, Professionals focus on the a few aspects of the client. However, considering all factors as mentioned such as investment objective, time horizon, risk tolerance, liquidity needs, tax situation etc is critical to provide the client with a stellar and bespoke service. After all, everyone is not the same.

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2 Choose an asset allocation framework

The next step is to choose an asset allocation framework that suits your client's profile and your investment philosophy. There are different approaches you can use to allocate assets, such as strategic, tactical, dynamic, or goals-based. A strategic asset allocation is based on long-term expected returns and risks of different asset classes, and does not change frequently. A tactical asset allocation is based on short-term market opportunities and deviations from the strategic allocation. A dynamic asset allocation is based on adjusting the portfolio according to changing market conditions and client circumstances. A goals-based asset allocation is based on creating separate portfolios for different client goals, such as retirement, education, or legacy.

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Priyank Kothari

Building My 2 Cents | Finance | Taxes | Strategy | Mutual Fund Distributor | ACMA | CFA all levels cleared | Kairos Fellow |
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Now once you have decided upon the client's portfolio basics your next step is to make a perfect asset allocation for the client. His biases and your biases play a key role when this is done. In India, we generally follow a goal-based investment strategy as it comes naturally but it does in no way mean others are less or more superior.

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3 Select the asset classes and sub-classes

The third step is to select the asset classes and sub-classes that you want to include in the portfolio, based on your asset allocation framework and your client's profile. You can choose from a wide range of asset classes, such as equity, fixed income, cash, real estate, commodities, hedge funds, private equity, or venture capital. Within each asset class, you can also select sub-classes, such as domestic or international, large-cap or small-cap, growth or value, or high-yield or investment-grade. The selection of asset classes and sub-classes will depend on your analysis of their expected returns, risks, correlations, and diversification benefits.

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Priyank Kothari

Building My 2 Cents | Finance | Taxes | Strategy | Mutual Fund Distributor | ACMA | CFA all levels cleared | Kairos Fellow |
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Once the over all asset allocation is done it is important to select the sub buckets, being a registered Mutual fund distributor I tend to ask clients of different goals and tailor the use of these accordingly.

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4 Determine the optimal weights

The fourth step is to determine the optimal weights for each asset class and sub-class in the portfolio, based on your asset allocation framework and your client's profile. You can use various methods to calculate the optimal weights, such as mean-variance optimization, Monte Carlo simulation, scenario analysis, or heuristic rules. The optimal weights will reflect the trade-off between maximizing the portfolio return and minimizing the portfolio risk, subject to the client's constraints and preferences. You should also consider the costs and fees associated with each asset class and sub-class, and their impact on the portfolio performance.

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5 Implement and monitor the portfolio

The final step is to implement and monitor the portfolio, based on your asset allocation decisions and your client's profile. You should execute the portfolio transactions in a timely and efficient manner, and ensure that the portfolio is aligned with the client's expectations and goals. You should also monitor the portfolio performance and risk, and compare them with the benchmarks and targets. You should review the portfolio periodically, and make any necessary adjustments or rebalancing, depending on the market conditions, client circumstances, or asset allocation framework.

Asset allocation is a complex and dynamic process that requires a lot of research, analysis, and judgment. By following these steps, you can help your client achieve their investment goals with an appropriate level of risk and return.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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How can you determine the right asset allocation for a client's portfolio?

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1 Assess the client's profile

2 Choose an asset allocation framework

3 Select the asset classes and sub-classes

4 Determine the optimal weights

5 Implement and monitor the portfolio

6 Here’s what else to consider

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