Transcript: What is asset allocation?
What is asset allocation?
Part of Manulife's investment basics video series.
The Manufacturers Life Insurance Company
Two men are standing next to each other on a white-screen background. JIM is an everyday guy wearing jeans and a casual button-down shirt. CHIP is a Financial professional with a neat haircut wearing a business suit.
JIM: Hey, gang. Jim here, along with my good friend, Chip.
CHIP: Good day.
JIM: When we were last speaking, we were talking mutual funds. Now it’s time to discuss asset allocation funds. Another fancy investment term, but what the heck does this mean?
CHIP: Great question, Jim. Asset allocation funds are similar to other mutual funds in the way they spread money among different types of investments to achieve a goal. The difference is that asset allocation funds spread money among different mutual funds and the goal is typically related to your age or risk tolerance.
JIM: There you go again. Let’s not overcomplicate this. Think about a mutual fund like it’s your favourite restaurant meal.
CHIP: Okay, I have no idea where you’re going with this one.
JIM: I got it, well, you’re the one who decides what dish you want, right, but then a professional chef selects the ingredients, prepares everything for you and makes sure the flavours are balanced.
CHIP: Hmm… I like that. But asset allocation funds mix a bunch of different mutual funds together to achieve your strategy within a single fund, so how would you explain that with your analogy?
JIM: Easy, well, asset allocation funds would be like the whole meal. A chef would prepare your drinks, appetizer, main course and dessert all within one meal. And then the goal – or strategy – would be to fill you up.
CHIP: Nice, that does work.
JIM: I know, so are you surprised?
CHIP: A little bit.
JIM: So, using the terms we’ve learned… Asset allocation means spreading your money amongst different asset classes and mutual funds to achieve a particular strategy.
CHIP: It’s all coming together! But doing asset allocation right takes effort and requires careful research of the various asset classes and individual options available, so what are your options?
JIM: Well, Chip, as I’m sure you were about to tell us, you can do this research yourself, work with a financial professional, or you can invest in an asset allocation fund.
CHIP: And some people just want to invest on their own, so asset allocation funds may not be best for them. But regardless of your strategy, you should monitor your investments regularly to ensure they’re still appropriate for you. And even though asset allocation and diversification help, they don’t ensure a profit or protect against a loss.
JIM: Thanks again, councilor. Just kidding, those are good points.
CHIP: In our next videos, we’ll talk about some of the different asset allocation options you that are available.
JIM: Until then.
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