Asset Allocation is Key to Investing
For the Long-Term
SVP Wealth Services
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
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