Question

Can you please tell me 'what/how' you go about asset allocation in/within your own lives (if you do...perhaps via a 401k or the like) and, what advantages and pitfalls you've experienced in this process.
If you've not yet addressed the asset allocation process...tell us how you would envision undertaking this process for your own personal investing decisions.

Lastly...'what' similarities/differences is/are there between one's own (personal) investing and that of a professional money manager for a large, national mutual fund firm

Answer 1

Asset Allocation is essentially determining the appropriate asset mix for your portfolio i.e. what proportion of the portfolio you want to be invested in stocks, what percent you want to invest in bonds and cash, based on your risk appetite, investment horizon, etc. Thus it must be noted that what suits the best for one investor might not necessarily be appropriate for another due to different risk-return expectations. If one opts undertaking the asset allocation process for his own investing decisions, he must first determine that for how long is he willing to invest. When a person aims to stay in the market for long duration and is willing and able to take risk in expectation of good returns, he must give more weightage to equity. Whereas if there is a person who is saving for his kid's college and needs money in a year or two, he must go for a safer and balanced mix in his portfolio - in that case he might want to allocate more to bonds or preferred stock. So when it comes to how to go about, one must be clear with all his needs and desires and go for what suits his expectations the most. Also, one must not forget that market does not compensate for company specific risk, so to eliminate the same from your portfolio, you need to diversify as they say 'Do not put all eggs in one basket'. Diversification is an effective manner to reduce the overall portfolio risk. This is how I envision undertaking this process for personal investing decisions.

Personal Investing does not involve fees and charges that one needs to pay to the mutual fund. Thus the cost is reduced to that extent. This is one difference between the two. Another difference is that it is not necessary that one has specialised knowledge to make appropriate decisions at the right time whereas mutual fund managers are people having expertise and experience in managing money which helps them take better informed decisions. However the similarity between the two is that mutual fund helps investors to invest according to their own risk appetite just how one would in personal investing. One can diversify in mutual fund as one could by personal investing.