How risk influences asset allocation

To strike the right balance between risk and reward in your investment portfolio, it’s important to carefully consider how you divide your capital among the various asset classes. In the investment industry, this process is known as asset allocation.

Some assets carry greater risk than others, so well-defined goals are crucial. Say you’re saving for retirement and you plan to stop working over the next few years. That means you will need to start drawing an income from your investments within a relatively short timeframe. In this scenario, you would typically start rebalancing your portfolio into less volatile assets like bonds. Bonds – especially those issued by governments of developed countries like the UK and US – are considered among the least risky investments because the danger of a government defaulting on its debt is low.

If you are younger and retirement is twenty or thirty years in the future, you could afford to take greater risk with your capital. Your portfolio could be overweight in equities, which are more volatile than bonds but also potentially generate superior gains. As your investment horizon is longer, your portfolio has more time to recover from short-term market fluctuations. It’s also worth bearing in mind that some equities are more volatile than others, for instance, emerging markets may offer better growth prospects due to demographic trends, but their economies tend to be less stable than developed countries.

Of course, cash is the safest asset class. It also generates the lowest returns, and your spending power falls if inflation exceeds the rate of interest your money is earning. Nevertheless, most investment portfolios hold a certain amount of cash.

While this list is not exhaustive, it should help you understand the risk profile for each of the main asset classes. Working out the optimal mix of assets is difficult and time-consuming though. Fortunately, because we are part of Openwork, the Omnis investment team can take care of these decisions, and the ongoing oversight of your portfolio, on your behalf.

Asset allocation within the Omnis range

Through Omnis, you can either invest in the Graphene model portfolios or the Omnis Managed Portfolio Service (OMPS). Graphene portfolios automatically rebalance back to their original asset allocation every six months. OMPS, on the other hand, are actively managed by the investment team, and they adjust the allocation within a clearly-defined range in response to opportunities or risks they identify in the markets.

Both sets of portfolios offer a choice of risk profiles: Adventurous, Balanced and Cautious, the main difference being the asset allocation. The Adventurous portfolios invest mostly in the Omnis range of equity funds, while the Cautious portfolios hold a higher proportion of Omnis bond funds. The Balanced portfolios fall roughly in the middle.

If you have any questions about which portfolio your money is invested in, or you’d like to know more about the Omnis funds and range of model portfolios, please get in touch.

The value of your investments and any income from them can fall as well as rise, and you may get back less than you invest.