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The Latest in Asset Allocation
by   Mark Wade  

Asset allocation, a vital component of any investor's financial strategy, is also the kind of thing that lends itself to sophisticated research. And it's relatively easy to study various angles: How can I best divide up my assets? How often should I revisit my allocation? Which asset classes suit me best? How are other investors like me making use of their assets?

Two recent studies point up important ideas for investors to consider in choosing how to allocate their assets. Both take a closer examination of something that is often overlooked as a part of one's portfolio: real estate. One of these studies argues that real estate is an asset class that may have been undervalued in the past; the other considers how the most successful investors are currently deploying their assets.


First of all, let's take a look at the study from the Richard S. Ziman Center for Real Estate, which is a research institution jointly run by UCLA's law and business schools. The researchers were interested in the question of how much the illiquidity of owning real estate affected its use as an asset allocation tool.

While most of us consider our home a part of our overall net worth, we don't always think of it as part of our portfolio. The study points out that fund managers - people who don't live on the real estate they own - treat it similarly, with a bit of distance, because they fear having too much illiquidity in their portfolios. But the research shows that an illiquid investment is not necessarily a detriment to a portfolio.

"The key is to realize that the relevant measure of liquidity of an asset such as real estate is not its liquidity in isolation but its contribution to the liquidity of an entire portfolio," said Steve Cauley, a UCLA professor who helped conduct the study. In other words, as long as you're not overextended in real estate, the illiquidity of that portion of your portfolio shouldn't be a problem.


The other piece of research, done last year by Northern Trust, a private bank in Chicago, took a look at investors with $1 million or more in investable assets to see what they felt the most optimal asset allocation was. Here, too, we see people making more use of real estate in their portfolios, especially in the findings that dealt with how two separate groups - the younger millionaires (under age 35) and the ones with more than $5 million - handled their assets. The wealthiest millionaires had higher weightings in alternative assets (defined as private equity, real estate and hedge funds) than the overall study group (26 percent vs. 18 percent). And nearly half of those in this group plan to put at least some new savings into these alternative assets within the next 12 months. They also had more of their money allocated to cash compared with the overall group, 16 percent vs. 13 percent. Similarly, the younger millionaires place greater weighting on alternative asset classes and less weighting on U.S. equities and bonds. A sizeable 27 percent of their portfolios is currently allocated to private equity, hedge funds and real estate. They hold even more of their portfolios in cash, 19 percent.

What does all that mean? It may mean nothing other than that people with a lot of money to invest - and younger investors who can afford to have a much higher risk profile - like to put that capital into riskier situations, since they are less concerned about suffering a substantial loss. Or it may mean that alternative classes are worth a second look from all of us.



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