Baylake Bank eNews. Member FDIC
Appropriate Asset Allocation is Key to Investing
For the Long-Term

John Hauser
John Hauser
SVP Wealth Services

We have all heard the phrase “Don’t put all your eggs in one basket.” Sound advice that can be applied to our lives in a variety of ways, but it is especially appropriate to apply it to investment management strategies. And, while its intent is clear, it can lead to more questions such as “How many, and what kinds of baskets should the eggs go in?”

In investment management vernacular, the term for dividing investments into different baskets is called diversification. Diversification involves spreading your money among various investments in the hope that if one investment loses money, the other investments will more than make up for that loss. Diversification should take place at two levels: within asset classes and between asset classes. So, in addition to spreading your money among various investments within a single asset class, like large cap stocks, you'll also need to invest in multiple asset classes such as government bonds, international stocks, small cap stocks, emerging market debt, real estate, and many others. The benefit of investing in multiple asset classes is that they behave differently in different market conditions, lowering the volatility of your portfolio and, therefore, reducing your risk.

The process of diversifying an investment portfolio between asset classes is called asset allocation. It has been shown that determining your asset allocation is the most important decision you'll make with respect to your investments – that it's even more important than choosing which individual investments to purchase. Each investor’s approach to asset allocation differs and depends largely upon his or her age, life stage, financial goals and risk tolerance. Generally, the younger you are, the more risk you can afford to take. A twenty-five year old who is just starting out in the workforce will have a completely different view of risk than a fifty-five-year-old approaching retirement.

But, it’s important to remember that asset allocation requires patience. It has been proven to be the right approach to investing in the long run, and no, three months doesn’t count. When we talk about an asset allocation strategy working, we are talking in terms of years, or longer. It is the investing equivalent of hitting singles and doubles – for a long time – more productive but not as exciting as an occasional home run. In fact, at any given moment there will be parts of your portfolio that you wish you didn’t own, and parts in which you wish you were more heavily invested. That is the nature of asset allocation. Be patient.

Keep in mind that asset allocation does not guarantee profit nor does it protect from losses in a declining market. It is important to regularly review your asset allocation strategy and adjust your portfolio as your circumstances and objectives change. This will not only ensure that the portfolio remains reflective of your long-term needs and outlook, but also address your short- and medium-term goals.

The process of building and reviewing an asset allocation model can be very challenging, so it is recommended that you seek the services of a financial advisor who will carefully look at your unique circumstances and design an appropriate portfolio mix for you.
 

 

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