Questions about where to invest money invariably come down to finding the right asset allocation model for the investor. The process of asset allocation normally becomes a tad simpler when the investor is looking at mutual funds as a way to not only secure solid returns (good and bad) but proper investment management.

Defining the right asset allocation model is not a two-minute process. As the cornerstone of your investment management strategy, it should never be taken lightly given the variations from one model to another.

Ultimately, any portfolio that incorporates equities into its program will fall under three different types of asset allocation models; conservative, moderate and aggressive, with conservative being the least risky and aggressive being the most aggressive.

Taking a closer look at each model, we will see the following:

Conservative Asset Allocation
25% Cash, 60% Income and 20% Equities.

With the exception of cash, the bulk of the investor’s attention (or the adviser’s) will be spent analyzing the quality of bond funds or other types of income-producing investments to incoporation in the model. With equities at just 20%, breaking the total portfolio into specialized growth funds would be futile. In most cases, the 20% Equities would be properly diversified by number of shares and type of shares and possibly even geography.

The Income component however will need to draw on several specific funds in order to be properly invested. This can include a small amount (say up to 10%) in high yield investments with the balance being spread around different bond funds (government bonds, muni bonds, etc., etc..). The point is that the income-heavy Conservative portfolio really puts a lot of attention on the Income aspect.

Moderate Asset Allocation
10% Cash, 30% Income, 60% Equities.

The greatest area of focus in a Moderate portfolio is shared by the Equities and Income areas. Some specialization will occur in the Equities portfolio (perhaps 10% to 20% in highly specialized funds, such as Real Estate, Energy, Healthcare and so forth) while the balance can easily be spread among domestic growth funds, value funds or a blend of both (up to 20%) with the balance being further diversified by geography.

Of course, the bond funds held in such a portfolio will also demand investor attention. A smaller amount of specialization is needed here (say 5%), but investors would be wise to consider high yield investments for this small percentage with the remaining 25% being gobbled up with high quality bond funds including a good spread between government and corporate bond funds.

Aggressive Asset Allocation
5% Cash, 15% Income, 80% Equities.

The Aggressive portfolio becomes an Equities-focussed portfolio. The investor will typically incorporate highly concentrated equity funds for up to 50% of the total portfolio in areas like Real Estate, Healthcare, Energy, Resources, Small-Cap, Venture and so forth. This represents a tremendous risk to the overall performance of the portfolio in terms of overall strategy. As such, the strategic asset allocation may shift on a micro level (shifting from 50% in specialty funds during boom periods to a more defensive 20%, and vice versa).

The Cash and Income components of such a portfolio then become secondary and normally represent the liquidity portion of the portfolio. Many investors are simply looking for safe parking spots for such money in order to take advantage of opportunities in equities and to earn income on funds they know they will not want to reinvest for some time.

These three asset allocation models evidently take a look at three types of investors insofar as equities holdings are concerned. Of course, these portfolios can become even more conservative once equities are removed. These models show the difference between the most conservative portfolio and the most aggressive and illustrate just how important the asset allocation process really is, even when (or especially when) dealing with mutual fund investments.

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