Morningstar Minute: A simple first-time asset allocation

This basic plan suits a long-term investor with a strong risk tolerance.

Shehryar Khan, CFA 9 February, 2017 | 6:00PM

 

 

Shehryar Khan: Morningstar's director of personal finance, Christine Benz, recently emphasized the importance of determining the right asset allocation for your portfolio. But there are still plenty of questions to consider after you've decided your broad allocations. An investor with a long-time horizon and a strong tolerance for risk should consider an equity-dominated portfolio.

But how do you determine, within your equities, how much foreign and domestic exposure to have is a question still to be answered. Canadians have historically tended to hold too much domestic equity. Canada accounts for less than 5% of the global economy, which means much of the world's growth comes from elsewhere. Having 60% to 70% of your portfolio spread over the U.S., international and the emerging markets is a fairly reasonable allocation, leaving you with 20% to 30% in Canadian equities, which is plenty of domestic exposure.

As Jim Hall of Mawer Investment Management likes to say, "A well-diversified portfolio should have contradictions." This means that for the remaining 5%, he wants something that will cushion any potential blows from a downturn in the equity markets or could generate some income. This could be as simple as holding cash or holding a core bond fund.

Above all else, your asset allocation should always be aligned with your investment goals and should be reexamined every few years to make sure things are still on track.

For Morningstar, I'm Shehryar Khan.

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Shehryar Khan, CFA

Shehryar Khan, CFA  Shehryar Khan, CFA, is a senior investment analyst for Morningstar’s Investment Management group.