The underlying principle of asset allocation is to diversify your investment portfolio among several different asset classes in an effort to reduce the risk and volatility of your overall portfolio and potentially improve your overall returns. Even if you’ve already constructed a plan, changes to your investment profile such as time horizon or risk tolerance may require adjustments to your asset allocation plan.
The plan you established last year may not be appropriate this year as a result of economic fluctuations or changes in your personal or financial circumstances. Your allocation to international investments might not make as much sense this year with slowing foreign growth and heightened terrorist concerns.
To start the review run through a quick exercise of determining your exact current asset allocation, on a percentage basis; add up your exposure to stocks, bonds, cash or otherwise. Then simply ask yourself: What type of market am I allocated for? Obviously, a bull market portfolio would have a high allocation to stocks or alternatives, whereas a bear market portfolio would have outsize allocations to high-quality bonds and cash. In a rising interest rate environment be careful assuming the bonds are risk adverse- the opposite could hold true.
Heading into the 7th year of market growth an important consideration is having adequate cash reserves, and possibly a downsized risk appetite. We all know the market will decline- after 7 years that likelihood increases. Adequate cash alleviates the need to sell assets during a downturn.
Many investors allocate most of their time to selection of assets. Designing your personal asset allocation and investment strategy is the primary component to your success; investment selection should be secondary to asset allocation.
Questions on your asset allocations? Give us a call!