Manage volatility with asset allocation

On the Money

You don’t have to be a millionaire investor to potentially benefit from a smart asset allocation strategy. Asset allocation – the practice of dividing your investments between different asset classes, such as stocks, bonds, international equities and cash may be a fundamental building block for a retirement portfolio.

Rather than “putting all of your eggs in one basket,” asset allocation allows you to own a mix of assets that seeks to manage the volatility of your portfolio while still helping you work toward your investment goals. The most important thing is not the size of a retirement portfolio, but the plan that goes into building one up over time.

The key is to spread your investments efficiently across various asset classes that may perform differently in different market and economic environments. That could mean an asset mix of funds, stocks and bonds that changes over time as your financial goals shift and your portfolio becomes more complex. While a sound asset allocation strategy doesn’t guarantee returns or prevent losses, a considerable amount of academic research shows that diversifying your investments accounts for more than 90 percent of a portfolio’s performance over time, rather than security selection or market timing.

Here are some other points to consider regarding asset allocation strategies:

  • Every investor’s circumstances are different and there is no one-size-fits-all solution. It’s important to know what your true goals are before investing.
  • If you are comfortable with more short-term market volatility, you could do a larger allocation to stocks, real estate or other assets whose value may change quickly, with greater risk but also greater return potential. If your risk tolerance level is lower, you may include a heavier weighting of less volatile assets that typically earn lower returns, such as certain types of bonds and cash equivalent investments.
  • Holding various investments with low correlation may help smooth out portfolio performance year-by-year.
  • An asset allocation strategy is designed to be a long-term solution. If circumstances in your own financial life change or market conditions warrant, you may want to make adjustments to your portfolio mix. Otherwise, stay the course.

-Joel Huffman is investment managing director at The Private Client Reserve of U.S. Bank in Milwaukee.

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