Asset allocation is a methodology that involves building an investment portfolio around asset classes — including stocks, bonds, cash, real estate, and other investments.
Nothing affects your long-term returns more than a good asset allocation plan.
Rule #1 – Diversify Your Portfolio
We all get the basic principles of “don’t put your eggs in one basket right”?
By spreading your money over several asset classes, you are less likely to lose it all, should the market sink. Unfortunately, when it comes to investing, diversification may not be as easy as you thought. Whether you are accidentally under-diversifying or even OVER-diversifying, diversification can be tricky! Here’s why:
Asset Classes Aren’t Mutually Exclusive
Aggressive investors invest heavily in stocks. While they might have great diversification in stocks, their entire portfolio can take a nosedive when the market is down. A properly set up nest egg is made up of a combination of stocks, bonds, commodities, real estate, and cash. So here is a list of the types of asset classes you can invest in to create diversification:
Traditional Asset Classes
- Stocks — including value, dividend, growth, and preferred, as well as small-, medium-, and large-cap, domestic, foreign, and emerging
- Bonds — including junk, investment-grade, government, corporate, short-term, intermediate, and long term, as well as domestic, foreign, and emerging
- Cash — and cash equivalents
Alternative Asset Classes
- Commodities — including precious metals, agriculture, and energy
- Real estate — including commercial, residential, and REITs
- Collectibles — including art, coins, stamps, classic cars, and vintage wine
- Foreign currency
- Insurance products — including life insurance and annuities
- Derivatives — including options, futures, and collateralized debt
- Venture capital
- Private equity
- Distressed securities
Roadmap to the Ideal Asset Allocation
Here are some important factors to remember when creating your ideal asset allocation strategy:
Humans are emotional – It’s easy to invest when the market is good and really hard to invest when it’s not. When emotions come into play, you are likely to lean too far one way or another because it feels right.
Don’t be afraid of what you don’t know – By only sticking to stocks and bonds, you could miss out on some great investments. Educate yourself so you don’t miss out on these opportunities.
Investments aren’t scripted – Diversification will not protect your portfolio when all asset classes tank at the same time like we saw during the financial crisis of 2007-08. That’s a big part of the game that people have problems with.
Avoid too many accounts – Managing multiple accounts can easily confuse you and cause you to forget to diversify one or more of them.
Be careful of diversification overkill – If you are diversifying your assets too much, you are likely missing out on potential gains and paying too much in transaction fees. The key is balance.
Another strategy to consider is tactical asset allocation or TAA. TAA involves active portfolio management by rebalancing the percentages of assets based on current economic conditions. For example; let’s say stocks take a plunge. You may want to temporarily rebalance your portfolio to focus on stocks. Why? Buy low, sell high. When everyone is scared, there are deals to be had.
Do-It-Yourself or go Professional?
Before tackling asset allocation, it’s important to understand that your situation is slightly different than anyone else’s. You need to setup your asset allocation to reflect your risk tolerance, financial goals, and timeline. So you must first decide on whether you want to DIY your own asset allocation, hire a professional advisor, or use a robo-advisor service to do it for you at an affordable price.
Do It Yourself – Obviously, the benefits to handling your own asset allocation allows you to save some money on paying professional fees and expenses. The downside is that you might not be updated enough on the goings-on of the stock market to choose the best diversification strategy for your personal needs.
Have a Financial Advisor – A professional can help pin point the best allocation for your current situation and investment goals. However, they will be a bit pricier than if you tried tackling it yourself.
Use a Robo Advisor – As a sort of middle-of-the-road option, a robo advisor, (such as WealthVenue) will choose a preset allocation strategy for you, based on your risk profile. This allows you to feel confident in your decision without paying a ton of fees.
Managing your savings, no matter how big or small, brings a myriad of decisions. There are many different options to consider whose viability depend heavily upon your personal circumstances. If you are open to giving a digital investing platform a try to boost your savings, click here and start investing with our easy-to-use platform.