Asset allocation reporting in Sharesight

by Doug Morris

In the TV show The Sopranos, Tony tells his wife Carmela not to worry because he’s “got his money tied up in asset allocation.” One could see why Carmela might be concerned about her family’s financial future given her husband’s line of work.

In reality, all investors have their money allocated in some form or another. Tony’s happened to be in large bills, hidden in bird seed in his back yard (not recommended in an inflationary environment). It’s wise to understand to what areas of the economy your money is exposed. What happens when stock markets perform well? What happens when the price of oil falls? How about interest rates? All of these macro and micro forces affect different parts of your portfolio in different ways.

Asset Allocation Reporting in Sharesight - Featured

The ultimate goal is to build a portfolio that’s diversified based on your personal situation. If you’re young, you’ll want to favour riskier growth assets because you can afford short term losses. If you’re nearing retirement, an asset mix towards cash and defensive holdings makes sense as you prepare to draw down your portfolio in retirement.

We designed our new Custom Groups feature with asset allocation reporting in mind. The challenge we faced though, was that customers define asset allocation in many ways. Some prefer a basic breakdown, others want more granularity. Furthermore, asset allocation looks different based on what country you’re investing from and what types of securities you can access.

Research has shown that asset allocation does matter. The academics at Ibbotson (now Morningstar) and the University of Chicago did some of the original work in this area.  The Importance of Asset Allocation and Asset Allocation is King are good primers.

How To: Asset Allocation Reporting in Sharesight

Even if you’re a stock picker, you’re probably making investment decisions with some respect to the overarching asset class the company belongs to.

Our Custom Groups feature lets you plug in any asset allocation methodology you prefer or create your own. If you’re new to asset allocation, our encouragement would be to start by classifying your portfolio based on areas of the economy that are typically decoupled:

StyleInvestment ExampleRiskDescription
GrowthEquitiesHighListed companies that may perform well long-term, but prone to volatility
DefensiveBondsLowInterest-bearing, highly rated government bonds or corporate debt
BalancedFunds, HybridsMediumManaged funds that invest in growth and defensive assets, or listed hybrids
CashTerm DepositsLowLiquid cash that can be accessed at any time, such as a savings account
AlternativesDerivatives, CommoditiesHigh*Range of synthetic investments designed for specific exposure or tactics

*Typically alternatives are riskier than other asset classes, although an alternative could well and truly be any non-traditional type of asset.

On the Custom Groups page, begin by giving your grouping a name. Basic Asset Classes, for example. Then, create your categories. Remember you can create more than one top-level grouping if you want to get more granular later.

Asset Allocation Reporting in Sharesight

Once finished categorising, check out the Diversity Report and ensure you view the report using your custom groupings. This will show you a current breakdown of your asset allocation.

Asset Allocation Reporting in Sharesight

Also check your Performance Report. Since each section of the report displays a sub-total this allows you to compare the performance of each asset class, which is critical when deciding how to rebalance your portfolio.

Asset Allocation Reporting in Sharesight

The above example is only a basic start. Many investors will want to break down each category into several sub-categories (equity style, for example), which is also easy to do with Custom Groups.