Investment Planning and Asset Allocation
Investment Planning and Asset Allocation
This domain tests portfolio construction for a client’s goals, horizon, risk capacity, liquidity, and tax position. Expect questions on asset classes, diversification, correlation, expected return, rebalancing, and the investment policy statement.
Core rules
- Asset allocation drives most return variability; diversify across assets whose returns are not perfectly correlated.
- Match horizon and liquidity: short-term goals belong in cash-like instruments; long-term goals can accept equity volatility.
- An investment policy statement records objectives, constraints, target weights, rebalancing rules, and benchmarks.
- Fees and taxes reduce net return; in the Philippines, peso deposit interest is subject to final tax, while stock exchange trades incur the stock transaction tax and dividends may face final tax.
- Rebalance to targets rather than chase winners; peso-cost averaging is a discipline, not a guarantee.
Worked example
Target allocation: 60% equities at 8%, 30% bonds at 4%, 10% cash at 1%. Expected return = (0.60 × 8%) + (0.30 × 4%) + (0.10 × 1%) = 4.8% + 1.2% + 0.1% = 6.1%. If inflation is 3% and fees are 1.5%, the approximate real net return is 6.1% − 3% − 1.5% = 1.6%. Reasoning: show gross expected return, then adjust for inflation and costs before projecting goal funding.
Traps
- Chasing recent fund performance.
- Confusing risk tolerance with risk capacity.
- Ignoring concentration in employer stock or property.
- Comparing returns without fees and taxes.
- Rebalancing by emotion instead of policy.