The delicate balancing act of asset allocation

When it comes to protecting and growing your wealth, the combination of investments in your portfolio can be as important as your specific investments.  Think of it like a recipe. Flour, eggs, and a liquid can be combined in various forms and quantities to yield very different results, from pasta to pancakes. Similarly with asset management, the mix of asset classes, such as stocks, bonds, and even cash alternatives, tends to account for most of the ups and downs of an individual portfolio’s returns. To continue the analogy, asset managers are the chefs who can help to ensure you have the right ingredients in the right proportions in your portfolio based on your individual goals.

Another reason to think about the mix of securities and investments in your portfolio is that each type of investment can play a specific role in your overall investing strategy and some can play more than one. Some may be chosen for their growth potential. Others may be included with the goal of providing regular income or offering safety. A few may simply provide a temporary place to park funds until they are reinvested. Pursuing various needs and desires of any individual client requires some combination of the various investment types.

Asset allocation is the term used to describe this delicate balance between growth, income, and safety; and helping clients to determine the right asset allocation for their individual circumstances is one of most important things we do here at Hauser Group Wealth Management.

Asset Allocation Overview



 

Weighing risk and return

Risk management is also a factor. In order to minimize the risk you take in pursuing a targeted rate of return, investors must balance more conservative investments against others designed to provide a higher return but that also involve more risk. To illustrate, if stock market returns have averaged about 10% annually, and bonds roughly 5%, one way to try to work towards a desired 7.5% return would be by choosing a 50-50 mix of stocks and bonds. Of course, there’s no guarantee that either stocks or bonds will perform as they did in recent years, but asset allocation at least gives you a starting point.

No one size fits all

Each investor’s individual circumstances will have a significant impact on their goals and the path to try to address them. The asset allocation needs of someone living on a fixed income, whose priority is having a regular stream of money coming in, will be very different than a young, affluent working professional who is focused on  saving for a retirement that’s three decades away. Model investment portfolios that recommend generic age-based asset allocations can help jump-start your thinking about how to divide up your investments, but remember that they are based on averages and hypothetical scenarios and, therefore, shouldn’t be seen as definitive. Your asset allocation should be unique to your circumstances. Sometimes even people of the same age with similar incomes can have very different needs and goals, which is why many turn to a professional financial advisor for assistance with determining a tailored asset allocation.

 

Asset allocation does not ensure a profit or protect against loss.

This is a hypothetical example and is not representative of any specific situation. Your results may vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.

 

Stock investing involves risk including loss of principal.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.