Question
I am formulating an asset allocation model for my fund portfolio and would like to ask you a question on this subject :
The usual asset model will include recommended percentages for equities, bonds, commodities, property and also cash. Please could you inform me if this element of cash is supposed to be just the part that the fund providers leave as cash; or is it supposed to be the total of one's own cash funds including cash ISAs, plus bank and building society accounts?
I would be grateful to receive clarification of this matter and thank you for your assistance.Answer
In general asset allocation models assume cash to be that in your investment portfolio, not your other savings. The rationale is that investors should have sufficient savings elsewhere to fall back on - so asset allocation focuses purely on investing.
The main decision when measuring cash weightings in portfolios is whether to include the cash balances held by the underlying fund managers. While doing so is more accurate, getting the data can be a hassle and it's usually at least a month out of date.
I tend not to bother (and just include a platform cash account and money market funds etc) as the majority of managers don't use cash strategically in any case. But it's good to be aware when holding funds where the manager does sometimes take big cash positions.
I am formulating an asset allocation model for my fund portfolio and would like to ask you a question on this subject :
The usual asset model will include recommended percentages for equities, bonds, commodities, property and also cash. Please could you inform me if this element of cash is supposed to be just the part that the fund providers leave as cash; or is it supposed to be the total of one's own cash funds including cash ISAs, plus bank and building society accounts?
I would be grateful to receive clarification of this matter and thank you for your assistance.Answer
In general asset allocation models assume cash to be that in your investment portfolio, not your other savings. The rationale is that investors should have sufficient savings elsewhere to fall back on - so asset allocation focuses purely on investing.
The main decision when measuring cash weightings in portfolios is whether to include the cash balances held by the underlying fund managers. While doing so is more accurate, getting the data can be a hassle and it's usually at least a month out of date.
I tend not to bother (and just include a platform cash account and money market funds etc) as the majority of managers don't use cash strategically in any case. But it's good to be aware when holding funds where the manager does sometimes take big cash positions.
Read this Q and A at http://www.candidmoney.com/askjustin/815/what-counts-as-cash-in-asset-allocation-models
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