Asset allocation is a vital component of any successful investment strategy. Simply stated, asset allocation is the strategy of dividing your investments among different asset classes to manage risk and help achieve your financial goals. Sounds pretty basic, but there’s a lot to consider when deciding how to put it to work for your portfolio.
At HighPoint Advisors, LLC, we aim to help clients in Syracuse, central New York, and other markets make informed decisions about asset allocation. Here, we’ll answer a bunch of questions we get asked on this topic.
What Is Asset Allocation?
Based in part on the idea of diversification, asset allocation is the process of spreading your investment portfolio among different asset categories, such as stocks, bonds, real estate, commodities, alternative asset classes, and cash. The primary goal is to balance risk and reward according to your specific financial situation. This requires you to consider your goals, risk tolerance, and investment timeline. Plus, you can reduce the impact of negative performance in any single asset class on your overall portfolio by diversifying your investments.
Why Is an Asset Allocation Strategy So Important?
A key benefit of asset allocation is that it helps to manage risk in a portfolio. Not all investment categories perform the same, either in the short term or in the long term. An easy classic example of this would be stocks and bonds. Stocks are known to provide a higher return over time than many other types of investments, but they can be very volatile along the way. Contrast that with bonds, which will provide some needed stability, but the price of that stability can be lower returns over time. By using multiple asset classes, you can protect your investments from major losses and potentially realize more consistent growth. That may prove helpful in reaching your financial goals.
How Do You Determine the Right Asset Allocation?
Well, there’s no magic or perfect formula, but there are some crucial factors that your allocation should depend on:
- Risk Tolerance: If you’re very risk-tolerant then you may want a higher portion of your investments in growth assets like stocks or certain alternative asset classes. If you are less risk-tolerant, then maybe more bonds and cash are for you.
- Investment Time Horizon: Younger investors who have long-term goals will be more aggressive with their investment allocations, as opposed to older investors who have a very short window of time until the investments will be needed for their short-term goals.
- Your Financial Goals: Are you saving and investing as part of your retirement planning in a decade or two, or are you saving to buy a boat in 2 years? Different goals require different asset allocations.
- Your Financial Situation: Allocations will differ significantly based on whether you have the ability to add additional cash to investments, the size of an investment account, or whether it’s actively or passively managed, for example. There are many financial factors that make each client unique, and those factors should drive their asset allocation.
What About Rebalancing? How Often Should I Do That?
Rebalancing is the process of repositioning your investments with the aim of bringing a portfolio back into alignment with your desired risk level. This can be done on a set schedule – semiannually, for example – or just whenever you think things in your portfolio have gone astray. Different parts of the markets move in different directions, so it’s usually smart to review your accounts at least once a year to determine whether a rebalance is needed. More frequent rebalancing may be called for if there are any significant changes to your financial situation or goals.
Can You Change Your Asset Allocation?
Absolutely, and you should. Periodic reviews of both your financial situation as well as your asset allocation are needed to ensure that you stay on track to meet your financial goals. Life events, major market developments, or changes to employment or income, for example, are reasons to review and refresh your plans and allocations. Asset allocations should not stay the same throughout your life. Take retirement planning, for instance; a common belief is that the asset allocation you had while saving for retirement should not be the same allocation you have as you spend your savings in your retirement years.
Navigate the Markets with HighPoint Advisors, LLC
Given how complex the financial markets have become in recent years, effective asset allocation is non-negotiable for a successful investment strategy. Hopefully, this article helped you to understand and begin a thoughtful asset allocation plan. Having an allocation plan can help you manage portfolio risk, work toward your financial goals, and achieve a more balanced investment experience.
Consider consulting with a financial advisor to develop a personalized strategy that works best for your unique situation. Our advisors at HighPoint Advisors, LLC have seen many different economic and market cycles, and we are here to help our clients in Syracuse, central New York, and beyond keep their asset allocation aligned with their goals and risk tolerance. Contact us today! We’re here to guide you on your journey to financial success!