Asset Allocation is Simple But it Definetly isn't Easy

Dear Speculators,

Investment is all about generating returns and the moment your investments stop yielding returns, you are no longer investing, you are simply expending. Investment returns can be optimized through intelligent asset allocation. The age long debate about asset allocation to stocks and bonds is inconclusive so don't even bother joining the drama. The principles of asset allocation though are universal and very simple to understand.

Now whether you invest all your money in stocks, bonds or a mix of both assets depends on the prevailing market conditions. Basically, it is comparing equity earnings yield versus bond yields. If the earnings yield on stocks is significantly higher than the bond yield, it means that the stock market is undervalued and you can invest 100 percent in stocks. If the bond yield is considerably higher than the earnings yield on stocks, it means that the stock market is overvalued and you can invest 100 percent in bonds. If the yield on both stocks and bonds are the same, it is advisable to have a balanced portfolio of both stocks and bonds. If the yield spread between stocks and bonds are marginal, you can invest a higher proportion in the asset class that appears to be undervalued.

Remember to diversify your investment in such a way that the potential risk for market volatility and capital loss is effectively minimized. The decisions you make today will determine your success tomorrow.

PS: Earnings yield is calculated by dividing the market price per share of a company by the earnings per share of a company multiplied by 100%. It is the opposite of price to earnings ratio.

Emeka Ucheaga,

Managing Partner,

Emeka Ucheaga Advisory

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